Why Bitcoin is Stupid

Well, shit. I’ve been watching this situation for a few years, and assuming it would just blow over so we wouldn’t have to talk about it here in this place where we are supposed to be busy improving our lives.

But a collective insanity has sprouted around the new field of ‘cryptocurrencies’, causing a totally irrational worldwide gold rush. It has reached the point that a big percentage of stories in the financial news and questions in Mr. Money Mustache’s email inbox are about whether or not we should all ‘invest’ in BitCoin.

We’ll start with the answer: No, you should not invest in Bitcoin. The reason is that it’s not an investment. Just like gold, tulip bulbs, Beanie Babies, 1999 dotcoms without any hope of a product plan, “pre-construction pricing” Toronto condominiums you have no intent to occupy or rent out, and rare baseball cards are not investments.

These are all things that people have bought in the past, and driven to completely irrational prices, not because they did anything useful or produced any money and value to society, but solely because they thought they would be able to sell them to someone else for more in the future.

When you make this kind of purchase, which you should never do, you are speculating, which is not a useful activity. You’re playing a psychological, win-lose battle against other humans with money as the only objective. Even if you win some money through dumb luck, you have lost some time and life energy, which means you have lost.

Noticed this ad on the corner of a website recently … because we ALL need daily updates on an obscure piece of niche software technology!

Investing means buying an asset that actually creates products and services and cashflow for an extended period of time. Like a piece of a profitable business or a rentable piece of real estate. An investment is something that has intrinsic value – that is, it would be worth owning from a financial perspective, even if you could never sell it.

Now, with that moral sermon out of the way, we might as well talk about why Bitcoin has become such a big thing, so we can separate the usefulness of the underlying technology called “Blockchain”, from the mania about how people have turned Bitcoin it into a big dumb lottery.

This separation is important because the usefulness of Blockchain is the primary justification people use for the big dumb Bitcoin lottery.

Once you make this separation in your mind, you can see that Blockchain is a simply a nifty new software invention (which is open-source and free for anyone to use), whereas Bitcoin is just one well-known way to use it.

Blockchain is just a computer protocol, which allows two people (or machines) to do transactions even if they don’t trust each other or the network between them. It can have applications in the monetary system, contracts, and even as a component in higher level protocols like sharing files. But it’s not some spectacular Instant Trillionaire piece of magic.

As a real world comparison, I quote this nifty piece from a reader named The Unassuming Banker:

… imagine that someone had found a cure for cancer and posted the step-by-step instructions on how to make it on-line, freely available for anyone to use.

Now imagine that the same person also created a product called Cancer-Pill using their own instructions, trade marked it, and started selling it to the highest bidders.

I think we can all agree a cure for cancer is immensely valuable to society (blockchain may or may not be, we still have to see), however, how much is a Cancer-Pill worth?

Our Banker friend goes on to explain that the first Cancer-Pill might initially see some great sales. Prices would rise, especially if the supply of these pills was limited (just as an artificial supply limit is built right into the Bitcoin algorithm.)

But since the formula is open and free, other companies would quickly come out with their own cancer pills. Cancer-Away, CancerBgone, CancEthereum, and any other number of competitors would spring up. Anybody can make a pill, and it costs only a few cents per dose.

And yet imagine everybody started bidding up Cancer-Pills, to the point that they cost $17,000 each and fluctuate widely in price, seemingly for no reason. Because of this, newspapers start reporting on prices daily, triggering so many tales of instant riches that you notice even your barber and your massage therapist are offering tips on how to invest in this new “asset class”.

But instead of seeing how ridiculous this is, even more people start piling in and bidding up every new variety of pills (cryptocurrency), over and over and on and on, until they are some of the most “valuable” things on the planet.

NO, right?

And yet this is exactly what’s happening with Bitcoin. And if you haven’t been digging into the cryptocurrency world much, it gets way weirder than this. Take a look at this shot from the website coinmarketcap.com, and observe the preposterous herd behavior in real life:

Fig.1: Various cryptocurrencies, ranked by how many people have been fooled.

“Holy Shit!” is the only reasonable reaction. You’ve got Bitcoin with a market value of $234 Billion Dollars, then Ripple at $92 billion with Ethereum right behind at $85,792,800,592.

These are preposterous numbers. The imaginary value of these valueless bits of computer data represents enough money to change the course of the entire human race, for example eliminating all poverty or replacing the entire world’s 800 gigawatts of coal power plants with solar generation. Why? WHY???

An Aside: Why should we listen to you, Mustache?

I’m only a mediocre computer scientist. But coincidentally, after I got my computer engineering degree I ended up specializing in security and encryption technologies for most of my career. So I did learn a bit about locking and unlocking information, hacking, and ensuring that independent brains (whether they are two adjacent CPUs on a circuit board or two companies negotiating across the Pacific) can trust each other and coordinate their actions in lockstep. I even read about these things for fun, with Simon Singh’s The Code Book and the Neil Stephenson novel Cryptonomicon being particularly fun shortcuts to pick up some of the workings and the context of cryptography.

But that’s just the software side (Blockchain). Bitcoin (aka CancerPills) has become an investment bubble, with the complementary forces of Human herd behavior, greed, fear of missing out, and a lack of understanding of past financial bubbles amplifying it.

Mustachianism – the mental training that gets you to very early financial freedom – requires you to evaluate inefficiencies in our culture and call bullshit upon them. Even if you are the only one in the room willing to do it.

In the field of personal wealth, this means walking your children past the idling lineup of your neighbors’ Mercedes SUVs, over the snowy grass and up to the door of the school – and being confident that you are doing the right thing. Even if you’re the only one doing it.

When evaluating investment bubbles, it means looking at where everyone is throwing their money – no matter how many billions – and being willing to say “Bull. Shit. Guys. Not going to do this with you.”

So I also read a lot about investment bubbles and fundamentals and how to tell those apart. One book that I found very useful in understanding the greed-fear cycle (and Central Banking and the Federal Reserve system to boot) is the 2001 classic Towards Rational Exuberance by Mark Smith. For a shortcut to understanding good investing, you can also simply look up Warren Buffet’s thinking on almost any topic – he’s careful enough about offering opinions that by the time he makes a statement on something, you can be pretty sure it will be among the best answers out there.

And of course, the purpose of this whole aside is that I want to establish credibility with you, so you will give this article some consideration. I believe the current Cryptocurrency “investment” mania is a huge waste of human energy, and our rate of waste has been growing exponentially.

The sooner we debunk the myth and come to our senses, the richer our world will be. So we need more credible people to speak out against it. If you’re one of these credible people, please do so in the comments or in a blog post on Medium that we can all read.

Why was Bitcoin Even Invented?

Understanding the motivation is a big part of understanding Bitcoin. As the legend goes, an anonymous developer published this whitepaper in 2008 under the fake name Satoshi Nakamoto. It’s well written and pretty obviously by a real software and math person. But it also has some ideology built in – the assumption that giving national governments the ability to monitor flows of money in the financial system and use it as a form of law enforcement is wrong.

This financial libertarian streak is at the core of Bitcoin, and you’ll hear echoes of that sentiment in all the pro-crypto blogs and podcasts. The sensible-sounding ones will say, “Sure the G20 nations all have stable financial systems, but Bitcoin is a lifesaver in places like Venezuela where the government can vaporize your wealth when you sleep.”

The harder-core pundits say “Even the US Federal Reserve is a bunch ‘a’ CROOKS, stealing your money via INFLATION, and that nasty Fiat Currency they issue is nothing but TOILET PAPER!!”

It’s all the same stuff that people say about Gold, which is also a totally irrational waste of human investment energy.

Government-issued currencies have value because they represent human trust and cooperation. There is no wealth and no trade without these two things, so you might as well go all-in and trust people. There are no financial instruments that will protect you from a world where we no longer trust each other.

So, Bitcoin is a protocol invented to solve a money problem that simply does not exist in the rich countries, which is where most of the money is. Sure, an anonymous way to exchange money and escape the eyes of a corrupt government is a good thing for human rights. But at least 98% of MMM readers do not live in countries where this is an issue.

So just relax, lean into it, and grow rich with me.

OK, But What if Bitcoin Becomes the World Currency?

The other argument for Bitcoin’s “value” is that there will only ever be 21 million of them, and they will eventually replace all other world currencies, or at least become the “new gold”, so the fundamental value is either the entire world’s GDP or at least the total value of all gold, divided by 21 million.

People then go on to say, “If there’s even a ONE PERCENT CHANCE that this happens, Bitcoins are severely undervalued and they should really be worth, like, at least a quadrillion dollars each!!”

This is not going to happen. After all, you could make the same argument about Mr. Money Mustache’s fingernail clippings: they may have no intrinsic value, but at least they are in limited supply so let’s use them as the new world currency!

Why not somebody else’s fingernail clippings? Why not one of the other 1500 cryptocurrencies? Shut up, just send me $100 via PayPal and I’ll send you a bag of my fingernail clippings.

Let’s get this straight: in order for Bitcoin to be a real currency, it needs several things:

easy and frictionless trading between people

to be widely accepted as legal tender for all debts, public and private

a stable value that does not fluctuate (otherwise it’s impossible to set prices)

The second point is also critical: Bitcoin is only valuable if it truly becomes a critical world currency. In other words, if you truly need it to buy stuff, and thus you need to buy coins from some other person in order to conduct important bits of world commerce that you can’t do any other way. Right now, the only people driving up the price are other speculators. The bitcoin price isn’t rising because people are buying the coins to conduct real business. It’s rising because people are buying it up, hoping someone else will buy it at an even higher price later. It’s only valuable when you cash it out to a real currency again, like the US dollar, and use it to buy something useful like a nice house or a business. When the supply of foolish speculators dries up, the value evaporates – often very quickly.

Also, a currency should not be artificially sparse. It needs to expand with the supply of goods and services in the world, otherwise we end up with deflation and hoarding. It also helps to have wise, centralized humans (the Federal Reserve system and other central banks) guiding the system. In a world of human trust, putting the wisest and most respected people in a position of Adult Supervision is a useful tactic.

Finally, nothing becomes a good investment just because “it’s been going up in price lately.”

If you disagree with me on that point, the price of my fingernails has just increased by 70,000% and they are now $70,000 per bag. Quick, get me that money on PayPal before you miss out on any more of this incredible “performance!”

The world’s governments are not going to let everyone start trading money anonymously and evading taxes using Bitcoin. If cryptocurrency does take off, it will be in a government-backed form, like a new “Fedcoin” or “G20coin.” Full anonymity and government evasion will not be one of its features.

And you don’t want it for this purpose anyway – after all, do you currently hide your money in offshore tax havens and transact your business on black markets? Do you practice illegal tax evasion as your primary wealth strategy? Probably not, because life is better and wealthier when you aren’t living a life of crime.

The Cryptocurrency bubble is really a replay of the past: A good percentage of Humans are prone to mass delusions which lead to irrational behavior. This is a known bug in our operating system, and we have designed some parts of our society to protect us against it.

These days, stocks are regulated by the SEC, precisely because in the olden days, there were many, many stocks issued that were much like Bitcoin. Marketed to unsophisticated investors as a get-rich-quick scheme. The very definition of an unsophisticated investor is “Being more willing to buy something, the more its price goes up.”

Don’t be one of these fools.

Further Notes

About the Comments Section: Normally, I try not to publish comments that are just emotional reactions or totally uninformed. For this article, I have set the bar much lower to show you the religious conviction that crypto speculators have.

People are genuinely mad at me for calling out this speculative aspect (note that I did not criticize blockchain at all, just the idea of uninformed people betting on future price increases for the arbitrary “coins”).

The general trend seems to be accusing me of “not doing enough research”, even after I dug into this stuff pretty deeply for a long, long time. I remain open to more information on the uses of Blockchain, but I’ve never seen a valid fundamental reason for betting on future increases in the prices of these things.

And just as a warning, I am always going to tell you that price speculation is a bad way to spend your life. This part of it is ideological to me: You Must Earn Your Money By Creating Value for Everyone.

Here’s a great description of the whole scene by Chain CEO Adam Ludwin. You’ll note that without prejudice and emotion, he describes the actual uses of the technology, without getting into how we should all place uninformed bets on its future value.

The real test of if you should be a cryptocurrency supporter: would you be exactly as passionate and spend the same amount of time thinking about it, if Bitcoin were still an obscure piece of code, worth less than one cent, and offered no chance of ever earning you any money? Because if you’re going to be an evangelist for anything, it needs to be purely based on the underlying merits, not what you hope it will do for your personal fortune.

This YouTube Video is one of the best shortcuts I found for explaining how Blockchain (and Bitcoin) works.

This Vice article explains yet another ridiculous aspect of Cryptocurrency: running the transaction network (called “Mining”) involves a deliberate computer-intensive crypto challenge syetem called “proof of work”. This inefficient design is now wasting more electricity than many entire countries. Doing one transaction burns 215 kilowatt-hours of electricity, enough to run the entire MMM household for more than a full month, or to power an electric car for more than 800 miles of driving.

Another interesting side-effect of bitcoin mining: big sales of computer graphics cards, and theft of electricity and cloud computer services. One of my coworkers at MMM-HQ works for nVidia, and part of his job is hunting down mining thieves who comandeer virtual servers (cloud computing) to mine coins on their behalf. Some of my conversations with him inspired the research in this article.

I enjoyed this analysis by Aswath Damodaran, a thoughtful investor and Professor at NYU school of business

“Bitcoin’s growth is not based on its technology alone (which, while powerful, is open-source and therefore easily replicable) but rather on the strength of virality, encouraged by the vested interests who held early and invested in marketing it; with no genuine business underlying it, it acquires its (very substantial) memetic potency only from the evangelism of those who hodl and preach.”

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Agree, the valuation of these cryptocurrencies are out of whack. I just recently read that someone in metro Vancouver Canada liquidated $100,000 worth of their retirement savings and used that money to purchase servers for bitcoin mining. I could only shake my head.

Meanwhile in China there are multiple football fields sized bitcoin farms.

Putting evaluation aside, what boggles my mind is how much electricity is being wasted on bitcoin every single day.

Vijay, I think you should sell every non-bitcoin asset you own, borrow as much money as you possibly can, and buy as many bitcoins as possible. This way you will be truly rich in 5 years.

VijayJanuary 15, 2018, 4:36 pm

Because I advocate something, I am not raving Mad! Invest in anything wisely and safely. Rule of thumb is never put everything in one basket. Crypto currencies are a must have component of your investments and should constitute not more than 10% of your overall investments, based on your risk appetite. This idea that you HAVE TO OWN ONE FULL BITCOIN is madness. You could just hold a fraction and still see it grow with time, much faster than most other investment avenues available today. Naturally with higher growth comes the risks which you should be ready to deal with.

BillyJanuary 16, 2018, 8:36 am

Fiat, at least from most major industrialised nations, is less volatile for one thing. Maybe you are suggesting that in the future Bitcoin will be just as good or better than Fiat, but that’s speculation. Bitcoin dropped 20% overnight, so it is not currently a very reliable store of value.

Dan CJanuary 18, 2018, 3:58 pm

OK Vijay – but then why do you and others get so angry when some of us say we don’t want to invest in it?

We’ve told you what we think of it. You disagree. No problem!

If you think it’s a great investment, go ahead and buy some / a lot – we are not stopping you.

VijayJanuary 21, 2018, 7:05 am

Dan, I am not angry when someone says they don’t want to invest in it. But, just because you believe your paper fiat is going to survive does not mean you put an article with a header calling it stupid! That is what is pissing me off.

Vijay – What ICO do you own? How much do you have invested in BTC? I’m just curious what your motivations are for all your comments. MMM has been writing quality PF content for years. He’s helped thousands of people improve their lives. You clearly have a contrarian opinion here. I’d love to know what your background is.

I 100% agree with what Vijay has been saying. You all and Mr. Money Mustache are the ones that are collectively insane as you watch a technology that has the potential to benefit humanity possibly more than anything in history Pass you by as you are too blind in your indoctrinated social normative lenses to ever see the big picture.

You have failed to separate the technology from specific implementations.

Blockchain may be the future, but that doesn’t mean any of the current currencies will be worth anything.

Vivek PrasannanJanuary 15, 2018, 9:02 am

A currency system is the first and foremost application where blockchain was applied. Many are trying to perfect it but until there is a clear winner, different ones will emerge. Right now if bitcoin enjoys the lead, what is there to call it stupid. Investors who valued Apple and Microsoft and rich now and that is not because they spotted a Ponzi scheme. They saw value in it very early. Why is the author so angry about this fact?

VijayJanuary 8, 2018, 5:48 am

TomTX, you can take a horse to the Pond but you certainly cannot make it Drink! You are a fine example of that specimen horse.

MichaelJanuary 10, 2018, 11:01 am

Vijay,

Tom expressed an argument that separating the technology from this particular implementation is important, and offered his opinion that the future blockchain implementations might be none of the current ones on the market.

You respond with an implied personal insult. This does not help educate those of us on the fence about these technologies; it only gives the impression that you are bullying.

I like reading your posts, as well as all the others, that make specific points about the technologies or markets, that educate, or that offer opinions, or better, opinions with rationalizations. Please drop the bullying and come back to join the conversation.

VijayJanuary 10, 2018, 6:05 pm

Read through TomTX’s posts below Michael and you will get to know who started. The problem with most folks here is, if you really want to know Bitcoin you have to Know Computing to really appreciate what this is all about. I don’t know how many of you can even get to understand what this is but hopefully you understand something from the URL I share below of how mining is done, and why this is not some idiotic electricity consuming joke!

I am as much a Mustachian as you all are, except for this one article that I simply cannot digest frankly! Human Kind has never had the opportunity to truly ‘own’ their money ever, and Bitcoin and Cryptocurrencies are the first time we even have that opportunity. Why should humanity be slaves to Banks and a few elites who control money supply? Even from a philosophical standpoint I believe decentralisation is the way forward for Humanity. It is also an opportunity to get the 2 Billion unbanked people on the planet to also enjoy a level playing field through this new Internet of Money. I believe MMM has missed the point completely in his rant above.

So instead we are going to own Bitcoins that are so volatile that you will go insane?

Banks and elites will remain even with Bitcoin, and if it goes your way it will probably the miningfarms and people who collect the most. No difference there.

You will not “own” your money more with virtual currencies. I own my currency as it is today (EUR and USD), how come you do not own yours?

VijayJanuary 4, 2018, 6:42 am

Do you really think you own your Fiat paper? Try doing one thing the Banks don’t want you to do, or the regimes in half the world’s countries don’t want you to do, and you will know how financially ruined you will be! US is just one country in this big bad world, and not vice versa!

TravisJanuary 4, 2018, 12:16 pm

Basic Economics Vijay. Money only has value if it is stable and trusted. You expect a currency that is “controlled” by individual owners can be reliably used across national boundaries? Why would anyone do business with a medium of exchange that is accountable to nobody?

Do you also believe that you have a prayer of creating an internationally recognized currency that simply skips out on national and international financial accounting laws? If so, congratulations. Your entire new medium of exchange is part of the black market.

Cryptocurrency could be the proverbial cure for cancer, but if it’s made illegal or heavily regulated through prudent or reactionary legislation (YMMV) it doesn’t really matter, does it?

VijayJanuary 5, 2018, 3:31 am

You are just parroting what every novice tells about Money. Do you think Governments and Regulators have sat on the sidelines so far while Bitcoin is just exploding to a point that MMM had to sit and write a huge article? The short answer is they can do nothing about it! For a long answer you need to understand the technicalities of it which I am not going to educate you on!

CijayJanuary 5, 2018, 4:35 am

You have unwittingly tripped up your own argument here. In stating that humans have never had a chance to own their own money you have hit on the essential problem with bitcoin and any other monetary alternative. Every currency has something behind it. In the US we call it the “full faith and credit of the United States”. In short this is nothing more than trust. Why do I trust the dollar? Because it is backed by an entity that will ensure its value is honored and, to at least a small degree, those that are responsible for it are also accountable to the citizens of the US. The reason that people have never “owned their own money” as you inelegantly put it, is because there is no “full faith and credit” under this model. Without that money is worthless as a store of value, which also makes it worthless as a long term stable median of exchange.

VijayJanuary 5, 2018, 1:47 pm

Full faith and what? I am laughing my ass out. That is bullshit written on toilet paper by a “Private Bank” called the Federal Reserve, owned by unscrupulous bunch of elites like your JP Morgan. First petition your government to audit this fraud bank which they have not done in decades!

ZamboniJanuary 5, 2018, 7:08 am

“2 Billion unbanked people on the planet to also enjoy a level playing field through this new Internet of Money. ”

Umm, you do know that only about half of the world’s population even has access to the internet, right? Over 3.5 billion people have no internet access; I am sure this is true as I thoroughly researched it for a chapter I published in a book this year. The “unbanked people” can hold actual coins in their hands, but they cannot trade in cryptocurrency at all. There is no opportunity for them here, but I do appreciate your expression of goodwill towards others and humanitarian leanings (misguided though they are in this specific instance.)

VijayJanuary 5, 2018, 1:50 pm

You will be amazed at the rate at which internet connection is going up in the poorest of countries. Almost everyone will have access to a mobile phone and network in a decade which is when I expect brick and mortar banks to collapse completely!

TomTXJanuary 6, 2018, 8:20 pm

Might as well own gold. Heh.

BigTasty1212January 11, 2018, 4:23 am

Do these 2 billion unbanned people 1) have internet access and 2) access to the initial bitcoin to get in on this internet money? If you don’t have fiat money to buy the bitcoin then someone is going to have to start getting paid in btc. So for it to be a global currency taco bell is going to have to start paying kids in btc. Do you really see that happening? Also if you’re going to start the whole not everywhere is like the U.S. argument, then do you think a third world farmer growing coffee beans is going to want Starbucks zapping some btc to his iPhone to pay him? If you want to move away from current currencies then you would probably have better luck starting a Craigslist for bartering website where you can’t list prices. Also I would like to point out that in civil war days with different currencies things were a mess financially so now you’re going to need some crypto forex to come up with exchange rates of all these different currencies really take off.

KEVJanuary 15, 2018, 4:19 pm

Vijay,
Slaves to banks and few elites?
This is so weak. Most of us, especially in the US and Europe, are free and are allowed to accumulate wealth through education and hard work.

Be careful what you wish for.
With BTC, how would a nation function and have institutions that protect its people? Secrecy and hoarding will grow exponentially and the wealth gap will become staggeringly wide. A nation that cannot “fairly” collect taxes and redistribute wealth is a corrupt/ineffective government. We clearly see them in Africa, Middle East and Latin America.

Who would help the poor, elderly and uneducated – those without BTC? It takes an open, transparent society that trusts its elected officials to do RIGHT. For the most part, far from perfect, I am very thankful that it works.

AT40manJanuary 3, 2018, 2:41 pm

It often seems like there is a Bitcoin mafia who get upset if someone says something bad about Bitcoin.

I put my money where my mouth is! I am not a millionaire either or have any heavy investments in any of this and I am not certainly looking to grow my investments by commenting on a blog, of all places!

meep erFebruary 13, 2018, 5:35 pm

Tulips anyone? Tulips? This black one here is only $1,000,000,000,000,000. Hurry! It’s the last one!
You gotta have it. Gotta! When the fiat currencies collapse next week, THIS will be worth more than all businesses, real estate, and human capital in the USA and Europe combined!

TomTXJanuary 6, 2018, 8:16 pm

Seriously? The “Fiat Currency” rant?

Bitcoin and altcoins consume a ridiculous amount of energy. Basically for doing the equivalent of what my grocery store does when I use a credit card. Plus, it costs something like $20 per transaction. Think that would fly at the grocery store? Sir, it’s $0.33 for that pound of bananas. Plus $20 to run the transaction.

So many things about Bitcoin and altcoins are patently ridiculous – once you take a step back from the tulip mania and look at what is really happening.

Bubbles or Tulip Mania as you put it don’t do what bitcoin has done since its inception in 2009. I have seen several bubbles grow and then burst, and one thing you learn is that an actual bubble rises like crazy and then totally pops. It doesn’t come right back a couple of years later and soar again to a new price 10 times greater than the previous bubble’s high, which is what bitcoin has done after each one of its three or four previous “bubbles” burst. That’s not a bubble, but something else entirely. Let’s take the oil price in the middle of the last decade as an example of a real bubble. The price went on a historic and seemingly unstoppable run all the way to $150 per barrel in 2008. It then proceeded to burst in spectacular fashion just ahead of the financial crisis, plunging all the way back to $30 before rebounding. Ten years later and the price is still nowhere near that prior high, with it currently trading around $60. That’s what happens when a real bonafide bubble bursts. It stays below the prior high for decade at least, sometimes forever. The behavior of bitcoin since the “genesis block” has been completely different.

While we’re on the topic of bubbles, it seems the truly gigantic bubble in the world isn’t bitcoin, but rather the global debt market. This leviathan now stands at around $233 trillion, or 318 percent of global GDP. Even more troubling, an estimated $11 trillion of government debt now trades at negative yields. This means whoever is buying this paper is doing so despite the fact they are guaranteed to lose money on the “investment.” Much of this buying has been propelled by central banks which can print their own currency and buy debt indiscriminately. This is not characteristic of a healthy financial system (particularly so many years into a global recovery), but rather a zombie one that’s been artificially propped up since the financial crisis.

And its back to 12.5K in two days. Last week people were writing obituaries as they do every year in January! That’s what I have been saying guys. You can keep saying its a bubble for eternity. Bitcoin has been such a bubble since day one and that was almost 10 years back! No bubble lasts that long and keeps growing exponentially.

rollie fingersApril 2, 2018, 7:38 am

bitcoin @ 7k, down close to 70%. Definitely not a speculative bubble….

Well then Biglaw Investor, you’d better stop using websites or stop supporting any company that does big data research, because that’s consuming considerably more electricity and it’s not fundamentally vital to us existing.

Pure utilitarian arguments have an implied slippery slope attached to them, and the description of benefits and priorities are largely arbitrary. Crypto currency as an ecosphere financially has benefited the tech industry dramatically, and if you invest like Mr Money Mustache advises, that means you probably have a good amount invested into the S&P 500. How’s that Nvidia stock doing now that GPU sales have been skyrocketing this last year giving them two record years in 2016 and 2017? Well that’s all due to the crypto currency craze. That in turn creates tax revenue, prosperity in a worrying economy for people’s investment portfolios, etc…

“According to the index, the amount of energy consumed by mining bitcoin surged about 26 percent in November alone and now totals nearly 36 terawatt hours, enough energy to power about 3.3 million homes. Digiconomist notes this would make bitcoin the 59th biggest energy consumer if it were a country.”

That’s a lot of electricity that can be used to power 3.3 million homes wasted. Given that China has a lot of bitcoin mines and electricity is produced by coal in China mostly… that’s a lot of unnecessary CO2 that just got bumped in the atmosphere.

Not likely, bitcoin mining farms are in China because of the cheaper energy costs. You can’t “vote with your wallet” in this situation, so you have no control over what practices the miners use.

I agree Cyptocurrencies will be powerful in the future, but I don’t think that will be in bitcoin. Bitcoin is the viral buzzword that has the momentum. But with 6-7 big mining players who dictate which fork of bitcoin to mine, the value of BTC or BCC or Segwit or whatever else comes, I have no faith in the value of BTC.

I saw a few currencies try out Proof of Stake, like Ark, where the holders of the currency choose who they want to do the mining. Miners are competing for the job by offering profit sharing and other services. Iota and RaiBlocks use something different than the blockchain to make each user a miner by requiring each transaction to verify other transactions which prevents transaction fees. We will have to see if that new blockchain style will win out.

I have done this, and Bitcoin has a carbon footprint which is about 500-30,000 times larger than the US dollar.

VijayJanuary 5, 2018, 1:55 pm

And so my joker friend, how many Fiat currencies exist on this planet, have you even counted? Bitcoin is a universal currency and is not here to just replace your USD alone! Also, what is the source of that study?

TomTXJanuary 6, 2018, 8:22 pm

Your question was answered. Your turn to supply real numbers.

VijayJanuary 8, 2018, 5:51 am

TomTX, nothing was answered. Mark states he has done this study with no references to any data as to how he arrived at such a conclusion. Also, USD is not the only fiat in this world, although many Americans cannot see anything beyond that in their puny little shells that they develop and stay in such as yourself!

SunJanuary 3, 2018, 6:10 pm

The big players in China use hydroelectric power. The dams generate electricity whether you need it or not. So, they sell it at a discount instead of losing revenue. Use it or lose it. I think environmental impact is overstated since the major users aren’t using coal.

Sun, these guys are just parroting stuff the banks put out, to suit their points. Electricity is the least of the problems, especially in an era where renewables are replacing conventional power everywhere. China is also a leader in renewables space.

It seems to me that what’s needed here on both sides is touch of humility. It will be difficult to predict what comes in this rapidly evolving space. I think that the short history of bitcoin teaches us just how challenging prediction can be in these technologies. I agree with MMM’s eloquent outlining of the major concerns with “investing” in cryptocurrencies. That said, I’m still not so sure. I can see scenarios where some of these platforms develop staying power and become increasingly valuable for the actual work that they are needed to accomplish. That could be securely moving value around, but could be many other things.

I’m not advocating throwing all your money into crypto (I haven’t see anyone say that). Even a significant percentage would be really stupid. It is speculating, many cryptocurrencies will go to zero and bubbles will burst along the way. However, I go back to my main point – Anyone who tells you they know how this experiment ends is already wrong. It’s super risky and probably not compatible with mustachianism, but that said it’s pretty interesting and I think it remains possible that MMM is wrong. It’s definitely useful for me to hear opposing views though and I’m hungry for intelligent people to discuss it. Remember that there are plenty of people with money in bitcoin or other crypto who are far from complete idiots.

The need for a cryptocurrency is very real. Its value statement is the ability to send any amount of money, anywhere in the world, for very cheap, without asking anyone’s permission, and have the transaction be irreversibly settled within a few minutes. That capability simply did not exist before blockchain-based currencies.

Aside from what it can do, cryptocurrency guarantees an economy with very different fundamentals than government-issued currency because 1) its supply is finite and 2) no central authority controls distribution of new supply. People are likely to disagree on whether this is a good thing depending on their worldview. I’d argue strongly that it’s a good thing.

Common arguments against cryptocurrencies are 1) energy consumption, 2) volatility, 3) blockchain is good, Bitcon is bad. I’d like to address each.

1) Energy consumption – Bitcoin consumes a massive amount of energy to secure the network. To compare with fiat currency, we need to consider fiat currency’s rippling effect on society. I argue that fiat currency is inefficient because its supply is always increasing. As the money supply increases, purchasing power is concentrated with the money creators at the expense of others holding the currency. As a result, the benefits of human progress are not reflected in our money’s purchasing power. Why should it not be? It’s hard to quantify the lost energy and human potential, but the cost is real. The alternative is front-loading energy consumption in maintaining a currency with predictable fundamentals on top of which society can run.

2) Volatility – the market cap of Bitcoin and other cryptocurrencies is small compared to that of fiat currencies. As a result, changes in perceived value result in big price swings. Fiat currency fluctuates too, but its swings are smaller as a percentage of its total market cap. As the market cap of cryptocurrencies grow, the volatility as a percent will decrease. A good analogy is a life raft on the ocean vs an aircraft carrier.

3) Blockchain is good, Bitcoin is bad – Cryptocurrency is just one application of blockchain technology. However, cryptocurrency is what incentivizes the network to secure a blockchain, so they’re two sides of the same coin. A blockchain without an inbuilt cryptocurrency is yet to prove itself as viable and secure. For those saying specific instances of cryptocurrency do not have long-term potential (Bitcoin, Ethereum, Litecoin, Monero, etc), the network effect is a force to be reckoned with.

If THAT does happen (BTC=100K), it will prove once more that BTC is not a currency at all. A real, usable currency CANNOT have such huge fluctuations. A REAL currency must be low risk+ zero (better subzero) return+good liquidity, and all those three things MUST go together. As of now, BTC has none of those characteristics.
Besides, how do you get BTC in the first place? By exchanging dollars or euros for a fee? Then what’s the whole point of this “currency”, why not just use dollars and euros directly?

Bitcoin reminds me of a story my daughter told me. She works as a school monitor and the kids have an area of the forest next to the school to play in. In that forest there are old bricks. The kids pulverize the bricks to make “brick dust”, which is the most valuable currency/commodity in their forest kingdom. When my daughter asked what you could do with brick dust, the kids looked at her like she was an idiot and said, “Well, buy more brick dust, of course.”

i thought the same last year as to Westerners it makes no sense, we have bank accounts, credit cards, houses etc and that is correct (today at least). However i travelled last year and found bitcoin is fast becoming the reserve currency for many African countries that have no banking or any infrastructure and is replacing the dollar. The US has most to lose if dollars are exchanged for bitcoin as the US will not be able to print the cash for almost no cost and then get countries to use it for payment (my advice is be very worried about dollar value over next 10 years) but it was genius and made America rich! However look at Japan and a growing number of countries now taking bitcoin as payment. also remember while the market cap is $230bn at least 20% of coins are lost from the early years. Satoshi, the founder, sits on 10% but he has never spent a single cent. A large proportion of other coins are long term holds. as long as people in their consciousness believe it is a store of value it is. it is as simple as that. i could talk for hours on the subject but Bitcoin is here to stay as it has already become central to a growing number of economies. also look at russian, venezuala and Argentina for more proof of bitcoin. Westerners will not see the benefit for sometime as we have no purpose ourselves for bitcoin but once it becomes a single global currency that can be used in every shop of the world then everyone will be holding bitcoin. Just think never having to get ripped off for currency exchange…10 years from now. Look up ethereum and Eos and read deeply on how fundamental this decentralised future beholds.

Glad to see some sense being written to the red necks who seem to inhabit this blog! Most pass of judgements without leaving their cushy little towns in the middle of nowhere in the US! The world is changing which many westerners cannot see. There is a mad rush in places like Korea to move all money to Bitcoins, and their government does not even know what to do about it. They said they are going to ban it, but there was such public outcry the government just backed off and now says they are still discussing the matter!

That is the right way to think about these things. As platforms. Maybe the currencies will be useful to, but the really useful ones will be the ones designed for some purpose. Even then, like with investing in a new company, you’re taking substantial risks.

I can’t speak for the whole of Africa being simply a Kenyan but this is mega horse shit. Many African countries have central banks. do not feed into this crap that there is no banking infrastructure. Yes there is. While I was in Kenya, the central bank had capped rates at 14%. Also, bitcoin lacks value in Kenya. Those who are in it are using it for speculative purposes, not as a currency. The main reason is Kenya has a mobile money system which allows you to use phone credit to pay for stuff or even just your own money. I thought it was pretty genius when back home.

I agree with most of this article (rather a rant, eh?), but to include gold bullion is not quite fair.

Gold bullion has several thousand years of history.
It is accumulated by countries, banks, and careful funancial entities.
It is subject to crazes and manias.
It is, above all else, pure wealth, other substances, and activities may be valued in gold bullion.
Thank you.
=,

Is it possible you’re confusing the message of this article? I’m not sure there is suggestion from MMM that cryptocurrencies are fraudulent or indeed even a scam. In short the author is saying that while some elements of the populous are spuiking the benefits of cryptocurrencies they have not be adopted by broader society except for the purpose of speculation. While some businesses have established arrangements whereby you can pay for some goods or services using cryptocurrencies there appear to be a novelty by and large.
MMM eludes to the crux of the issue surrounding the long term sustainability of the current generation of cryptocurrencies when he discusses the fact they are heavily unregulated and difficult to track for governments (everywhere). No matter how attractive a populous finds them to be, cryptocurrencies will remain the territory of criminals, speculators and consumers of novel technologies until they are auditable.

I’m not sure why the author is so angry at people who speculate. Speculation is essential to set a market price for anything. It’s a constant struggle to find the right price. Everything that’s happening in the crypto space is just so normal as you would expect investors struggling to get the price right for something beyond the control of regulation. Why would the author call this act stupid? How else should people behave? I don’t see any other motive behind this article other than a biased effort to please someone, especially with the choice of words used like ‘stupid’, ‘ridiculous’, ‘holy shit’ – as if everyone who parked 700 billion on crypto belong to an alien species.

Speculation is very useful and I don’t think anyone is going off on peoples choice to speculate, but people are very bad at properly evaluating risk.

The value of bitcoin is very far removed from any sensible fundamental valuation, and the thing driving up the price seems to be a common sense that it will be worth more in the future. Speculating on bitcoin for this reason only really works so long as there is some new greater fool who joins in on the speculation after you have bought.

People went off on many rants back when a single tulip bulb could have the same value as a ocean going ship, just as back then we had many people who couldn’t stop talking about how great tulip bulbs are and why we should all be buying them.

Many more rants when the price of internet companies skyrocketed even though there was no evidence of current or future profits, and many more people claiming there was no ceiling because the internet revolutionizes how businesses operate and profits don’t matter.

Further more rants about the skyrocketing cost of housing and how many people cannot afford their mortgages, with further people saying mortgage payments won’t matter because those people can just sell for more when the payments become a problem.

Speculation is great. When the common person does it, it can cause very big problems.

Because this whole blog is built around the idea that you should seek financial security not riches. Hence, he advocates value investing not speculation. He is skeptical of anything that has a tinge of a get rich quick scheme. As should everyone.

Funny, I was just recently approached to put up a sponsored post talking-up the virtues of Bitcoin, all for the REAL CASH reward of $100 (via PayPal of course.) Apparently they didn’t like my edits, where I called out rogue nations for propping up BitCoin as a means to bypass sanctions. They probably also didn’t like my stated aversion to cyptocurrency and desire to stick with boring real estate.
Seems to Pete’s point, there’s an awful lot of marketing push behind something that has dubious use cases and limited long term value. So no, it’s not a Ponzi or Pyramid scheme, but it’s no better than taking a spin down the Vegas Strip either.

I’ll go with Ponzi Scheme. Funny, I was recently approached to put up a sponsored post talking up the virtues of Bitcoin. All I had to do was sell the integrity of my blog for $100 non-bitcoin bucks (via PayPal of course.) I agree with Pete. Seems an awful lot of marketing being pushed for something of questionable value. Unless you’re a rogue nation trying to dodge sanctions…?

I think it’s a bit of stretch to call Bitcoin a Ponzi scheme. A Ponzi scheme is a fraudulent operation designed to steal people’s money. There’s nothing fraudulent about Bitcoin – it’s mass hysteria driving demand. If I lie to you and take your money, that’s one thing. It’s totally different when you lose your money by yourself.

Besides, there’s value in bitcoin, like with gold or a comic book, or any other item people assign a value to. The question is if one is worth $15k?

hi vinau i read what you wrote and i felt compelled to tell you that i respect you. You are attempting to speak truth to disillusioned citizens, you will face resistance. Do not give up. You are a noble man !

I don’t mind people investing in Bitcoin because it’s not my money. But yes, I would not invest in crypto currency.

Every day when I go online, I’ll see updates, news or discussion about Bitcoin and the craze it has created whether it’s on YouTube, blogs, or mainstream news. For me, it’s just like watching a show that I don’t know the ending of yet. Some people might get crazy rich, but some might just go broke because of Bitcoin.

I’m patiently watching on the sideline to see how this is going to pan out.

The amount of people who have posted on /r/personalfinance this year who sold crypto, then bought back in, and lost big, is astounding.

Devs in their mid 20s who owe the IRS 50k and lost most everything.

It’s closest to an MLM for me. ie beauty counter for nerds. If you aren’t selling people around you on the big dream, you probably won’t make as high of return. The shovel sellers are the real winners here. They have been making a killing.

Couldn’t have said it any better myself. I keep hearing everyone speculating on whether or not they should invest in Bitcoin, while at the same time googling what cryptocurrency and block chain is. It makes you want to laugh and cry.

And EVERYONE is posting, podcasting, and reporting on it. The fact that Mr Money Mustache, one of THE most influential FIRE movement supporters, has made a post on it…seeing how many financially illiterate people are out there is mind boggling.

I agree with you, Chris. I try to lead people to conclude what I have. If they talk about investing in BTC or any crypto CURRENCY, I say, “well, I think I’ll invest in Mexican Pesos”. How’s that any different. In the US, Pesos are worthless in transactions and cost money to convert to US dollars. Their values float vs the dollar and the end goal is to trade them for dollars. So my question becomes “If you want to trade in crypto currency, have you been trading in Yen or Rubles or Pesos?”. I’ve yet to find anyone who has.

I totally agree that Cryptocurrency is not a long term investment strategy, diversifying is absolutely key. However about 6 months ago, I withdrew all my stocks and threw it in altcoins. I made 400% and pulled them out. I also invested in a bitcoin two years ago, and paid off all my debt with it. I know have around $20k in crpyto having invested around $3500. So every time I say Bitcoin/altcoins are a stupid idea, I chuckle. There’s no way I could have paid down my debt and netted $14.5k in stocks in less than a year with less than $5k in capital.

I’m thrilled to see the “godfather” speak on this. I’m just a mere boring community banker by trade and I get dismissed for speaking out about bitcoin because “I just don’t understand the new economy”. Bitcoin is used for some pretty awful things, the accountant at my dad’s prior employer stole $500,000+ and likely hid it from the authorities.

This bubble is going to break, the environmental waste is awful, and CNBC “legitimizing” this as investing with ticket symbols must stop. Appreciate the post MMM

This is exactly what I was thinking. People who have been trading 100’s to buy illegal goods must be making out. I’m fine with crypto but not as an investment. if there was something I wanted to buy online from another country and they didn’t take the dollar for whatever reason it’s an OK solution.

In all fairness, cash USD is also used for illegal activities. From arranging hits to buying drugs to political corruption. I don’t think attacking how Bitcoin is being used is a good argument because of this.

Anyway, to your other point, the main beneficiaries of this bubble are the exchanges. The fees are incredible. On the popular Coinbase it will cost you about 4% just to exchange USD for BTC. You will also have to pay a fee to transfer from the exchange to your wallet. Most people can’t afford to drop huge amounts in crypto at one time, so you have college kids paying $2-3 every week buying $50 worth of BTC. It’s a complete rip off.

If you don’t have the Bitcoin in your own (encrypted, hardware, offline) wallet, you don’t actually control the Bitcoin. Exchanges get hacked or “hacked” (where the operators secretly run off with the coins) all the time.

and we live in the middle of it. The bubble crashed and the internet didn’t die. Google, Amazon and Facebook came out of it.
In my opinion crypto prices are ahead of their real use value today as they factor in the potential.
They may settle to much less, or get close to zero, or they may grow more, no one can really predict this.

The issue with the .com bubble was internet companies were given a high valuation with no demonstration that they were profitable or even provided a service/product. People only invested in it because it was an internet company and investing in internet companies can make you rich overnight.

Just the same with crypto-currencies today. People will release new ones all the time and people invest in them, not because they will ever be useful but because they expect the price to skyrocket.

Bitcoin has very little usage. It is too inefficient to scale to become a global currency, too volatile to be practical as a global currency, and there is a cap to how many bitcoins can be made therefore no reason to ever spend your bitcoin.

Bitcoin has very little potential for the long term. Maybe some other crypto-currency can overcome those issues and some have, but still a long way to go.

I have these lovely tulip bulbs for sale, please PM me. They are very valuable and the price is sure to rocket! Travis, your are right. And this, MMM… ” There are no financial instruments that will protect you from a world where we no longer trust each other.”
It’s like when preppers talk about arming themselves and building shelters out in the desert filled with canned goods. I reply, if it’s gotten that bad, I don’t want to live in that world anyway. Very good article!

Yeah, I had watched/listened to lots of Andreas’ stuff as part of the research for this. He appeared on the Kevin Rose podcast as well.

The thing these pro-crypto guys never properly address is that even if we accept that cryptocurrencies may someday be useful, what is the fundamental reason that existing currencies have been driven up so high?

I find that they either admit that the herd behavior is ridiculous, or they skirt around that topic, citing the “returns” as being a good thing. You need some sort of fundamentals, and in bitcoin there are none.

The technology is fine.

The bidding up of prices in pursuit of speculative riches is not fine.

And important thing to note here is that underneath (almost all) stocks are actual engines of growth with hundreds or thousands of humans working hard, churning out profits, earnings, and dividends. If I buy and hold a share of S&P500 ETF for the rest of my life, I will earn back the share price in quarterly dividends eventually.

Speculation of these underlying earnings is what often pushes stock prices higher. Not the only reason, but if earnings don’t pan out, stock prices won’t necessarily drop. They could also plateau until earnings catchup with prices. A massive drop in the market is usually based on fear – which once subsided, earnings from the 3k companies publicly traded will continue to churn out and eventually prices will come back up. They always do.

No guarantees that if bitcoin drops that it will ever come back. The stock market over the long run will ALWAYS grow as long as the population and technology and our output as humans continues to grow.

Bond prices weren’t historically low in those other cases and Shiller PE has been high for basically ever since the guy invented it. This might be “normal” for an era such as this, where the growth is coming from real tech companies instead of widget makers. Amazon has a stated strategy of no profit–how does one price that?

It also could be a bubble, but the crypto billionaires (the few or the hundreds who end up “winning”) will still need to buy their Doritos and Gameboys and lambos and helicopters, and I’ll own shares in those companies no matter which currency is used.

Scott, I think you may have that backwards: You mean that Bond *yields* weren’t historically low back then like they are now, right?

Bond *prices* are higher than ever today, which is the reciprocal of them having a high yield.

Yes, it is true that bonds are *also* in a bubble at the present time—and that the bond bubble is so big that it makes stocks look relatively cheap by comparison. But in reality, both stocks AND bonds are in a bubble.

You are correct to note that Since the late 1990s when Shiller started promoting the CAPE ratio stocks have regularly been in bubble territory.

(FWIW, CAPE had actually been studied in academic settings many, many decades before Shiller, and was a favorite metric of the legendary Benjamin Graham in the 1920s and 30s. Shiller really just “rediscovered” it. But it is a valuation technique that goes back practically as long as there have been stock markets.)

Anyway, in real terms, US stocks have been in a secular bear market since 1999.

Again, as this chart shows, stocks, priced in gold, are still down about 60% from their peak in 1999:

What you are describing is called a “silent crash”. It is when stock prices stay the same in nominal terms but everything else rises in price around them, effectively masking the very real stock market crash through inflation.

This is exactly what happened in the 1970s: The nominal price of stocks remained roughly the same while their effective purchasing power was cut more than in half

“…eventually prices will come back up. They always do.”

Again, only in nominal terms. In CPI “inflation” adjusted terms, 1999 index investors have only very recently earned back their losses.

While it is true that stocks are probably expensive right now, one thing that doesn’t get mentioned enough with Shiller P/E is the “E” represents the 10-year rolling average inflation-adjusted earnings. That means over the next 2 years, the Shiller P/E will be rolling out some of the terrible earnings numbers from the global financial crisis. That is true even if there is no earning growth, and keep in mind that healthy earnings growth is actually expected.

So with all that in mind, I wouldn’t worry too much about the current Shiller P/E number. Market timing is a fools errand anyway.

Unless, of course, it starts rolling *in* terrible new earnings compared to price, which is certainly possible.

We have been in an “expansion” (the weakest one in US history) for almost 9 years. They don’t tend to go longer than that. I believe this is currently the second longest expansion in US history. And nothing that can go on forever, does.

One way or another, at some point, the cycle will end, and the cycle will start again. But there are two ways for the cycle to reset:

1) The price of stocks collapses but earnings don’t collapse nearly as much. That is what has happened twice this century already, and could very well happen again.

2) Prices rise so much that earnings increase while stock prices remain the same. This results in a “silent crash”, and a loss in purchasing power for stock holders—even if the nominal price of stocks remains the same.

Either one will get your CAPE ratio back into whack. It seems like you’re advocating for scenario #2.

Since the Fed can always print as much currency as it wants, I would probably bet on scenario #2 as well, so perhaps we’re half in agreement.

I don’t know if stock prices will go down. But they don’t have to go down for there to be a US stock market crash in real terms.

MMM could have just posted a video like this where a not-famous-youtuber is boasting about how he is going to “start investing” 3% of everything he makes into Bitcoin for his “nest egg” because he missed out when he first opened his Bitcoin wallet 4 or 5 years ago:

His main investing motivation because he feels like he’s late to the game and wants the earnings he could have had. This video epitomizes the Bitcoin market right now.

I’ll stick with the stock market thank you very much.

PS. The comment about “1999 investors didn’t receive their investment back from stocks until this year” – well, for the rest of us that don’t invest 100% of our money in the stock market in one instance AND we reinvest dividends, this type of situation is almost impossible. I’ve been investing steadily over a 20 year period. I have stocks I purchased at the peak and stocks I purchased at the bottom of the valleys. I’ve never heard of anyone investing 100% of their net worth in a single moment in time that could get penalized for that type of freak market condition.

Right! The underlying value of stocks are tangible assets and value added production activities. Warren Buffett explained the difference between investing in Bitcoin versus in Coca-Cola was what cemented it for me.

A lot of stocks never pay dividends though. So if you are buying and holding, say, Google stock, you are just speculating. Even if they made a hundred trillion dollars next year, you wouldn’t see any of it unless you sold your stock to someone willing to pay a higher price for it (or they started paying dividends). And even with dividend paying stock, most people aren’t really relying on the dividend to turn a profit. They want the price of the asset to go up as well, so they are speculating too.

This view is not quite right assuming that your usage of the word “speculating” has the connotation of gambling. “Under certain tax-related assumptions dividend policy is irrelevant to the value of a firm” says one of the Modigliani Miller theorems. Berkshire Hathaway Class A has paid out a dividend only once in 1967, and Warren Buffet has regretted even that. Does that mean investing in Berkshire Hathaway is speculating? A stock is not a ticker symbol; it is a stake in an underlying business. Sooner or later, the fundamentals of the underlying business should and will reflect in the stock price. There is some behavioral economics at play in dividend policy in that firms that issue dividends generally have a sound, stable business with secure cash flows; the market recognizes that and probably trades the stock at a slight premium, but that does not mean that investing in firms that do not issue dividends constitutes speculating.

Regular money has nothing behind it either. Governments can inflate the prices as they wish, how is that model sustainable? No, I am more inclined to trust economic models where the rules are clearly defined and cannot be changed, by anyone, ever. I’m more inclined to trust contracts that cannot be broken. When contracts cannot be broken nobody needs to oversee contracts. Nobody needs to worry about whether terms will be met. A lot of jobs today exists only to oversee things. Guess what, we can automate all of those jobs with cryptocurrencies. We can effectively automate trust. That is something very valuable just like stocks are.

Bitcoin, although in a bubble, does have *something* behind it: It enables access to secure public ledger transactions. (And very badly compared to other cryptocurrencies.)

Is this likely to be worth $20,000 long term? No. Is it likely to be worth $0? No. Is it likely worth closer to $0 than to $20,000? Probably.

This is the same exact dynamic as tulip bulbs: Do tulip bulbs have a value? Absolutely. But again, that value is likely to be closer to $1/bulb than $10,000/bulb.

A similar dynamic is at play with stocks: Is $1 of ongoing future earnings worth sacrificing $1 today? Absolutely! that would be a PE ratio of 1. That means an implied 100% cash-on-cash return every year. What a bargain!

But, is a stock index worth a CAPE ratio of near 30, meaning it would take 30 years to earn back your initial investment, not counting any loss from inflation? Heck no. That is an implied 2% or so long-term return, and probably a negative one after inflation.

And it gets worse: Some large, popular components of the S&P have a PE of closer to 300, meaning it would take 300 years to earn back your initial investment. Some of them have no earnings at all.

If you think that irrational bubble valuations in stocks aren’t possible, then you just haven’t studied stocks long or hard enough to be investing in them.

MMM, Internet has pretty much destroyed every industry it has pitted against. Latest being the retail apocalypse. Bitcoin is a nascent technology and will evolve with time. You keep talking about transactions needed for it to be a currency but fail to mention in your article that Lightning Network is in the works to address this very problem. Naturally sentiment plays an important role in BTC’s price. Ultimately, Bitcoin’s functionality is what the digital asset should derive most of its value from. Since we are still in the opening stages of the Bitcoin phenomenon it is BTC’s perceived functionality properties that should drive the current price action, not so much the mania and the speculation aspect. Although it is difficult to put a price tag on the speculation and mania portion of BTC’s price, as sentiment strengthens in regards to Bitcoin’s future functionality prospects the price should continue to increase.

Sounds like a bubble to me. Everything is awesome, we cannot fail, it is great! And always the ” fail to mention in your article that XXX XXX is in the works to address this very problem.”

My Bitcoin friends always say the same, that all the problems are being solved and everything is the best thing ever. Because reasons, technology and internet!

Personally I fail to see the reference between Failhypecoins and retails challenges with shopping online. Still no fundamentals. Or streaming music, and streaming movies!

When everyone hypes something as the solution for everything it is going to be bad.
Sure speculate, but this is not going to be the future as it stands now. If you want just one reason it is that governments will not allow it. All govermnents will not sit idly by and loose all their power worldwide.

Blockchain yes, coins no.

The reason internet “destroys industries” (?? destroy? positive change I would say, the world is getting smaller) changes is because it makes things easier. Bitcoins etc does not make it easier at all.

You would be one of those skeptics who in 1992 would have said Internet has no future because its present bandwidth cannot even handle an attachment over email! Today, 20 years down the road you are watching 4K videos on it! If you could have somehow monetised the Internet in 1992 and sold it, imagine how rich you would be right now? That is where we are with Bitcoins. Right now a nascent currency like Bitcoin is not able to handle the transactions in a similar fashion due to limited bandwidth, and people like you point that out and say, look it cannot even handle the current level of transactions how is this thing going to replace Visa or MasterCard? Also, saying Blockchain Yes and Bitcoin No is tantamount to saying, Social Media is great but Facebook is not so great, or Internet Search is Great but Google is not Great!!! There is a very good chance that this article will be the butt of jokes 5 years down the road, when the toilet paper fiat currencies are all passe!

Bitcoin has just 200 billion capitalization currently. Allow it time to grow to say 10 trillion, and then let us debate on stability. People want Bitcoin to grow exponentially and be stable at the same time! How is that even possible?

Jay HoldenJanuary 3, 2018, 7:20 am

“If you could have somehow monetised the Internet in 1992 and sold it…”

In your example, the 1992 internet might be comparable to Blockchain – time will ultimately tell. However, investing in Bitcoin now seems more along the lines of investing in a BBS in the early 90’s.

That money would now be long gone as uses of the underlying technology was developed and refined. Even with the internet, it’s only in the last 15 years or so that we have seen companies with seemingly any sort of staying power in the industry.

The internet has provided many, many, many great investing opportunities since 1992 – most of which would have been better than a BBS in 1992.

Educate yourself on why Bitcoin and Blockchain cannot be split up. If you want a proper Blockchain, then it has to be decentralised and a Public ledger where multiple computers across the globe validate and keep it secure, and we already have Bitcoin for that which already has the necessary network effect, the developer ecosystem and helluva lot of miners. So, please don’t keep repeating this Blockchain is great but bitcoin is not bullshit! Go educate yourself first. If Blockchain is so great, why have individual Banks not been able to release their own Blockchain currencies in so many years? Simple answer is, they cannot have a secure private Blockchain. Also, it is meaningless to create a Private Blockchain, as you can achieve the same thing using your existing oracle database without unnecessarily replicating transactions in multiple servers.

BeccaJanuary 3, 2018, 8:57 am

Your examples exactly prove the point: social media is great, but the first ones to take off weren’t the winner… remember SixDegrees, Friendster, MySpace? Same with internet search: remember AltaVista, Lycos, Dogpile? How much are these companies worth today? If cryptocurrency takes off, it’s much more likely that the winning one hasn’t even been created yet, if history holds.

The ones that take off will likely be gov’t created versions. No gov’t is just going to let the ability to control their economy be taken away from them. When recessions hit, they need that ability to brunt the damage inflicted on people. Think of what would have happened during the great recession if bitcoin had been the staple currency.

VijayJanuary 3, 2018, 10:40 am

Well, that is not what we are discussing are we? MMM calls Bitcoin Stupid and all these things as some kind of Ponzi Scheme!

Tim BeckJanuary 3, 2018, 12:58 pm

BTC won’t be the winner but with over 1300 coins the winner has likely been created.

JohnJanuary 3, 2018, 2:37 pm

I did Control F, and verified that MMM never used the word Ponzi or Pyramid, and in fact Vijay, you were the first person to bring up the Ponzi Scheme topic, and then you linked some article (which I did not care to read).

TimJanuary 3, 2018, 9:01 am

Remember there was social media before Facebook. Facebook is probably the 4th or 5th legitimate social media platform. So yes, blockchain = good bitcoin=maybe? It remains to be seen. Based on the completely over hyped behavior, I’d guess it’s going the way of sixdegrees.com or maybe myspace if bitcoin speculators are lucky.

No major government will transact in a currency it cannot control. It will NEVER happen. You can give up that wet dream right now.

Tim, do you think Bitcoin cares what the Government thinks or wants? It has been made ground up to be censorship resistant and has been thriving for past 8 years despite singular opposition from every quarter. Governments have no choice here. All they can do is to ban and stop the exchanges. Even in a police state like China their actions have failed!

AndreasJanuary 4, 2018, 6:29 am

Nope I am not a skeptic, and also since I was there then (with “pre-internet” BBS). I also remember that bubble..sure a lot of things moved to the internet but it had to crash..hard first.
Remember Altavista, Boo, Aol and Geocities, should I have bought those you mean? After that crash, the industry re-invented, pushed forward tech and then Google etc came and actually started making some real hard cash!

Probably the same will happen again.

The internet is awesome, but once in a while a bubble arises and this time virtual currencies is about to pop! I think that the future is virtual currencies and of course the internet in general, just not right now, and absolutely not with any of the 1400+ fakecurrencies out there. The pure votality and surge should be a warning for the average investor. But again, this is not investment but speculation!

When “everyone” is on the train and praising it like it is the next coming of Jesus or whatever? What usually happens when this occurs? We end up in Utopia? Or? Think about it and I know you realise what is happening. Do not let your own brain trick you for easy solutions!

“Probably the same will happen again.” – I would say, Probably the same would not happen again. Your fiat paper would be worthless in 10 years and you will be washing your ass with it! Now, when that happens, I am ready either way. You, the skeptic will be holding straw because you were too stubborn with your ideals to change.

Scott NicholsonJanuary 4, 2018, 7:36 am

I can 100 percent guarantee you that my mom and pop will still be using fiat paper, and so will I, and so will the world’s governments. I think the far greater chance is your comment will be the joke.

Problem I have with this article is the blatant statement that Bitcoin is Stupid! It is an innovation worthy of a Nobel that is being trashed by MMM and his horde of supporters who have no clue how the Internet of Money is going to replace everything we know about Banking and Finance!

Probably, but I don’t care. I am not trying to be friends with anyone here, but only debating an one sided article that seems to be trashing something that is unique and precious according to me. Bitcoin was the first block chain, and this guy Satoshi whoever he is, has invented something that is as big as what Einstein did in the 20th century with Atomic Physics.

So, you’re saying that Bitcoin is equivalent to PSINet, one of the first ISPs. Got it.

They went down in flames, btw.

VijayJanuary 15, 2018, 4:45 pm

Bitcoin could also be the TCP/IP and will probably be the world standard in 10 years!

BryanGJanuary 3, 2018, 12:34 pm

Vijay, what MMM is saying is that cryptocurrencies like Bitcoin cannot presently operate as currencies. Thus, they are not useful, and produce nothing useful. If that is the case, their values are strictly driven by speculative bidding, making them the worst sort of “investment”. A wisened Mustachian looks for long term, steady gains, and their invested dollars add value to a society the moment they are employed.

With cryptocurrencies, you are literally betting that world governments, the G20, all major banks, The United Nations, financial institutions, exchanges, Elon Musk, Warren Buffett, and all existing fiat currencies will change as radically as retail shopping has in the past 25 years. Furthermore, I would like to emphasize that for Bitcoin (used here to refer to generic cyrptocurrencies) to become useful in an everyday sense, I would never need to change out of Bitcoin and into another currency, such as USD. So you are further wagering that Bitcoin will literally supplant the USD as the world medium of financial exchange, and frankly, that is kinda bonkers. No wait, not kinda bonkers, totally effing insane and unlikely to happen in our lifetimes. Me personally, I’m betting on the buck.

Do you know the state of US debt recently? It is 110% of your total and entire GDP, and that is just your Federal Debt. If I add your state debt and unfunded liabilities, US is BANKRUPT! Yes, that is your ground reality today. What are the world currencies pegged to ? – Air and the US Dollar. What is the US Dollar pegged to? Pure Air and a bunch of IOUs that it will eventually default on. Fiat currencies my friend is working overtime for its own demise. Bitcoin is actually a saviour that provides the world an opportunity to get out of total mess without fighting a WW3!

Alright then, do you have all your money invested in cryptocurrencies? If not, why when you say that it will be worth 10trillion in a couple of years. Hell if I believed that I would work my ass of taking EVERYTHING I could and putting it into cryptos!

So, are you or are you not doing this?

And btw, just switching currency is not going to remove any debt.

AceJanuary 15, 2018, 11:15 am

“their invested dollars add value to a society the moment they are employed.”

Are you saying wisened mustachians own no stock or ETF of any tobacco companies? Smoking brings zero value to society, only net negative. Check your funds.

Spot on VIJAY. This will go down in history as the DUMBEST thing Mr. Money Mustache has ever written.it honestly pisses me off how dishonest he is and his he can’t see the big picture out of his Statist status quo lenses.

Calling this a waste of human energy is NUTS. This is the greatest use of human energy and capital the world has ever seen. Saving billions from poverty, war, and the enslavement of banks or the lack of any banking is Altruistic. Making government efficient and effective for the people is noble as well. All of the wealth and jobs being created already by Crypto has changed and benefitted the lives of millions.

Vijay, it’s okay. Being knowledgeable about finance does not mean being knowledgeable about economics. Missing the forest for the trees kind of thing. Let them hold on to their fiat currency if they like to.

I am beginning to get it Mattheus. These people are either shit scared of the changes that are going to come, or don’t understand macro economics. MMM writes things like “currency should not be artificially sparse and should expand…”. This fiat economy itself is only 40 year old. We have never in history had such expanding currency supply backed by NOTHING. Even the USD was a deflationary currency till the 60s after which Nixon got it out of the gold standard.

That’s fairly over the top.
Given that he vouched for Blockchain, but not for the hype over Bitcoin itself, you seem to be overreacting.
I doubt you really believe this is going to overthrow all of our current financial system.

I do believe hyperbitcoinization will happen in a decade or two. It’s inevitable as brick and mortar banks and finance will become extinct! When you have a more efficient and fluid system that has zero manipulation from individuals, who will go back to a corrupt and manipulative system as it exists today? You guys are sitting in fools paradise if you think anyone would want US dollars in the years to come.

First: cryptocurrencies have not demonstrated lack of manipulation. At the moment, they’re incredibly volatile compared to the monetary systems of the developed world.
Second: Human nature actually tolerates a *lot* of corruption in exchange to stability, so I don’t think we’ll be switching over to this science fair project any time soon.

VijayJanuary 5, 2018, 8:02 am

This volatility thing that seems to be biting you folks is because Bitcoin is at 200 Billion capitalisation today. Let it get to 10 Trillion + in a couple or so years and then you come back talking about its stability! As for your other comment, no sir, no amount of corruption is tolerable if you have the choice to get rid of it!

TomTXJanuary 13, 2018, 7:09 pm

Yep, really fluid and efficient system that takes 3 days and $20 to record a single transaction…

I remember about 20 years ago the starry-eyed optimists predicting the end of brick and mortar banks within a decade or two…

VijayJanuary 14, 2018, 6:08 am

Educate yourself on Lightning Network or layer 2 protocols of Bitcoin. It is already in Beta testing and will be released this year. Some companies are already testing it in main net as well! Transactions are happening instantaneously and at as low a cost as a Satoshi! You are a dumb man TomTX!

MMM, you cannot call Bitcoin Stupid and then go tangentially into an Utopian discourse. We cannot have better living conditions for half of humanity on this planet under a corrupt and manipulative central banking system of various countries, that are not even true democracies. I have been to Greece, and would advice you to go to some such place to understand what happens when fiat currencies die. All this bullshit about “backed by faith and credit of my country” goes out of the window when currencies die someday. People suffer immensely. A decentralised system where no human has the power to manipulate money supply is the best thing that any society can expect, to get its finances and economy in order. Just imagine if an universal decentralised currency becomes the world’s reserve currency! The poorest in Sub-Saharan Africa earns the same money that you sitting in Manhattan, NY do. That is when we are talking equality and progress for all! Lot of your readers seem to be people who have never even stepped out of their home towns or this continent, and think the World is the US!

Alright, time for a thought experiment. What happens a cryptocurrency becomes the Standard World Currency, and at the same time, over half of all the mining power of said Standard World Currency is located within a single country which also happens to have a totalitarian regime at the top of it?

Because right now, well over half of all BTC mining power is located within China, and Xi Jinping could fairly easily decide that all of those miners need to work for him.

NOTHING HAPPENS! There you go. Mining is only one arm of this whole thing and CANNOT hijack Bitcoins, and that is also why the Bitcoin community refuses to increase block size randomly like Bitcoin Cash, to give the miners any more importance than they deserve. Even if Mining gets centralised, Bitcoins future cannot be dictated to by them!

Well, imagine you are in 1963 and you hear the speech “I have a dream…” from Martin Luther King on abolishing slavery and you ask the question “Why do you think this will happen?”. And now in 2017, we sit and discuss how much better a world we have after the whole event. This is exactly the same – “I have a dream…”.

Mark DJanuary 3, 2018, 3:39 pm

The reason Bitcoin has been driven so high is because it’s a limited supply. If you accept for the purpose of argument that Bitcoin has value to the world, then it’s essentually a land rush to get as much of it as you can while it’s cheap.

It’s funny reading your article because while I’m a true believer in bitcoin as the internet of money, I feel pretty much the same way as you do about 99% of the rest of crypto. There valuation of pretty much everything but Bitcoin and Ethereum is unjustifiable.

Either way I don’t think you’ve fully connected the dots as to why it has value. The value of a blockchain is its immutability, derived from its decentralization. No one controls it, so no one can rewrite the data. So right there you can scratch off any use of blockchain as pointless if it doesn’t benefit from immutability. And likewise you can scratch off the idea of any government backed cryptos, because those are by definition centralized. Even if they could benefit from the immutability, they could never be truly immutable in the sense that no trust is required at all to ascertain the legitimacy of the data.

So in order to have immutability, we need decentralization. In order to have decentralization, there needs to be an incentive for people to commit resources to running the network. Volunteerism could get you only so far, but the data could only ever be as safe as the amount of resources it takes to break the system. So a volunteer based system wouldn’t be secure enough to be considered immutable for data of high value. So just like you say there’s nothing stopping you from creating your own Bitcoin, it’s the same code….unless you could attract hundreds of millions of dollars of computing power to ensure data integrity on your blockchain, it’s as worthless as your nail clippings.

So there’s a positive feedback loop here. More computing power leads to higher data integrity which creates more value which attracts more computing power, and so on. The cryptocurrency is the glue that holds the system together.

Note that if you remove any of these essential elements, you’ve made the system effectively worthless. Take the decentralization, the trustlessness, the miners or the currency out and you throw the immutability out. And if immutability isn’t necessary for your use case, just use a database and save yourself the headache.

So now that you’ve got an truly immutable public data store, what do you do with it? Currency is by far the most obvious application. So no surprise that’s the first one, especially considering you need it to make the system work at all. But that’s just the start. Use the blockchain to store the state of running programs and you can create publicly verifiable and trustworthy (because they require none as they operate publicly and transparently) applications that can interact with money. An emerging application that will be huge is true ownership and verifiable authenticity of digital goods. Or physical goods if you want to use it to record land or vehicle deeds, etc. Publicly verifiable voting as well, when the chains are worth trillions.

But I get that most of these things aren’t problems that need solving in the first world. The problems it solves for the billions of people in the second and third world shouldn’t be so casually dismissed though. But anyway….you need a little imagination to see the value it has for the first world, because it has to arise from something other than a replacement for something preexisting. So by definition we need to start talking about things that don’t exist yet because they *can’t* exist without immutable blockchains.

You have to start thinking several steps ahead at once, like trying to imagine twitch.com in 1990. Millions of people streaming interactive video games. Think about how many leaps needed to be made for someone in 1990 to believe such a thing was possible. The internet. The web. Inexpensive computers thousands of times more powerful than the best you could buy for $10K in 1990. Broadband. Video compression tech. Networking. A billion dollar gaming industry creating games worth watching. A digital advertising ecosystem to fund it all. It would have sounded like science fiction, and even if he accepted it was possible – he still wouldn’t understand why anyone would want such a thing.

So what I’m saying is…don’t dismiss it based on where you see today’s generation using today’s rudimentary blockchain with today’s technology and society. Think about how tomorrow’s generation will use far a more advanced blockchain tech to interact with far more advanced internet and general tech to create things that we can’t even conceive of yet, let alone why they would have value. And then follow that thread all the way back to the fact that the future blockchain(s) all of these future uses are built on are going to be continuations of the most valuable blockchains of today – because valuable blockchains are a prerequisite for the data integrity required for high value use cases. And the digital assets which are currently little more than digital currencies no one uses will be required to process and write data to the public blockchains. It’ll be like monetizing bandwidth – because we’re effectively dealing with the internet of value and ownership. Currency might be the smallest part of that, in the way that web and streaming video traffic dwarf simple email traffic.

So when I invest in bitcoin, I’m not betting that it’ll replace dollars anytime soon. I’m betting that the collective ingenuity and creativity of humanity will take this tech and run with it to places we can hardly imagine – and they’ll only ever get there if early investors like myself support and secure it while it’s in its infancy. And like investing in anything, it’s not a matter of altruism – if I’m right about the continuity of value in blockchains as measured by the value of its underlying currency, I’ll see a healthy return on my investment.

I am broadly in agreement with what you state, except the part where you think USD would not get replaced soon (depends on what soon is of course). I am of the opinion all of Fiat will get wiped out in a decade or two! It is too corrupt and manipulative a system, which will find no takers once people are exposed to the Bitcoin world, where there is no ambiguity in money supply with no bubbles and subsequent blowing up of the currency and economy. All that the US has done since 2008, is hit the ball further and further down the road while at the same time blowing it more and more with air (read Quantitative Easing). Now the ball has reached proportions where it could blow up anytime, and people in this forum are talking about the small change like the bubble and P/E ratio in the stock market. Talk of being blissfully ignorant! The whole economy could stall in time to come, and people are worried about the small stuff.

This is the best post on this entire comment thread. I’m pretty disappointed that no one responded to the points brought up by Mark D. Just more tulip bulb analogies, glib dismissals, etc. I’m going to try putting some of my thoughts together in a post at the bottom. This is really useful for me to hone my thinking about the topic. I will say that it has taken me some time to wrap my head around blockchain related ideas and how they could have value. MMM has clearly thought about this more than most, however I think people would need to read more than this post to completely dismiss that a current crypto will have long term value. It’s clear from reading the comments that most people don’t understand how this works. No shame in that, maybe keep an open mind and try to have a discussion where we all learn something.

Bitcoin values are delusional. The tulip mania was a delusion. Real investments require production and income. All true.

Also true. In Ancient Rome and today one ounce of gold bought a very nice dress suit. In short, historically gold is the truest measure of value, the safest store of wealth, and best insurance against fiat money and other manias (see Weimar Republic circa 1934).

Trust yes. And verify. There is a reason that central banks own most of the wotlds gold. Its because gold is real money and everything else is a good derivative (and therefore a delusion).

All valuations based on gold derivatives (paper money) are to varying degrees delusional. The rise in bitcoin represents people waking up to one delusion (false paper valuations) and unfortunately accepting another delusion—that digits are more valuable and trustworthy than paper.

I think that gold is nothing special – it’s a shiny rock. I don’t get the whole thing where people think fiat currency is just useless paper and then turn to gold. It has a track record though i’ll give you that.

Looks like I made a big mistake then. In one of my IRA’s I bought some AAPl in 2009 for $28k. It grew to $240k. Then in November I sold it and bought GBTC, which is a OTC fund holding bitcoins. The account is now worth over $500k, but the high was closer to $700k. Should I just get out now? No doubt it will crash but I think it still has room to go. It’s cut a few years from our projected FIRE date.

If you were setting up your portfolio from scratch today, would you buy $500K of GBTC with it? If not, you may want to think about selling.

How much of your net worth is in this “investment”? If you can afford to lose the $500K and want to let it ride, go for it. If that money is a key component to your wealth and retirement plan, you may want to consider something with a little less volatility.

Oh my gosh, get out! Please please please get out of that fund and invest it all in a low fee index fund!

Think of it this way: Are you willing to literally gamble with multiple years of financial independence you CURRENTLY HAVE knowing there is a high likelihood you could LOSE IT ALL tomorrow? I wouldn’t! Take that money and RUN!

Congratulations on your earnings. I know a lot of people in the DOTCOM bubble in the 2000s that were too focused on maximizing profits and lost most of their wealth on paper after the tech crash. Whether you should get out is a difficult question. Rather than maximize profits, what about minimizing regrets? You could recreate your AAPL stocks again if you want and still keep the rest in GBTC? Or sell half of GBTC. This way, whichever direction GBTC goes, you won’t be in a regretful situation.

I think getting out with $500,000 would be a great thing, but then that would be an enormous amount of money for me. It’s interesting that you state the high water mark was $700,000, but now it’s $500k. My heart would break if I said goodbye to $200k. Would yours?

If you want to continue the ride, why not let the original investment of $28,000 ride? You’ve made a great profit, and you can “play” with that $28k.

Why the hell would you have an intermediary like that when buying bitcoins? That’s crazy. Exchanges and funds get looted (or “looted” by the operators) all the time. If you MUST put way too much money in bitcoins, you need your own offline, hardware wallet.

It’s absolutely astounding how the general (pretty darn) intelligent public can’t tell the difference between an real asset vs an investment. My friend who has a Master’s in Computer Science inquired with me about investing in Bitcoin before Christmas and I told her essentially what I thought as mania.

Bitcoin CANNOT shelter you, pay dividends nor feed you. It’s a speculation, pretty much like buying gold. It’s diversification…. at best. It’s a huge money maker if you can bet that you’re not the bigger fool.

My mother in law collected beanie babies and I had the pleasure of looking up their worth this Christmas back home…they’re about $5 each and I will owe eBay 10% + shipping. Darn things didn’t even pace with inflation. At least they’re cute and the grand kids like them! I don’t think Bitcoin will be very snuggly.

I have to disagree with one of your points here: in a worst-case scenario, if you have enough gold, you may be able to beat it between some rocks to make a serviceable frying pan. Consequently, there’s a very limited way in which gold can feed you (and bitcoin can’t)

Gold is not necessarily a “speculation”. It is a commodity. Buying it is not necessarily speculative.

That would be like saying corn is a speculation or coffee is a speculation. What if you want it for yourself, or have customers or distributors that do?

To call gold a “non-productive asset” misses the point entirely. It is not an investment. It is a “good”. Do you fault coffee or corn or wheat for being “non-productive”, or do you appreciate them as goods, at an appropriate price?

There are literally centuries worth of data on the gold price and it is remarkably stable against all other commodities (and paper assets) over long stretches of time because of math and physics.

Assuming you can know the exact price of a commodity on a given day is speculative, yes.

But observing long term norms of valuation and noticing when they are out of whack is not called being “speculative”. It is called “being informed about reality.”

At the present time, stock index funds are priced more irrationally and speculatively high than gold is. Here is one interesting chart among many that shows exactly that:

Even things that can be good investments can be in a bubble. Stocks and bonds and real estate can all enter into bubbles. It doesn’t mean they are in bubbles at any price. It just means that some price levels are reasonable, and some are not.

Well said!
Gold has always been considered a commodity of high value. You’re not going to get rich by collecting metals, but you might stay rich with them. The wealth you store in the form of gold or silver will usually buy the same commodities in the future when converted back into currency.

Dear Mr. Mustache, I am so sorry you had to write this at all. I’d like to apologize on behalf of all humanity that you were compelled to spend some of your life energy on that. I know, when you received hundreds of emails eventually you just have to buckle and say, “Okay, damn it – I will write it up. Maybe then it will go away.” So you did. It’s a little like taking out the garbage. It really starts to stink if it is left unattended to. God speed my friend. Now let’s get back to your kick-ass money savvy engineering experiments :-)

Oh, don’t feel too bad. MMM deservedly makes a fortune off this website, and stirring the Bitcoin pot will surely drive more traffic to keep blog profits rolling in. Not saying that’s why he wrote the article, but just that there are certain advantages to being an Internet Celebrity, one of which is that everything you write turns to gold, er, uh, bitcoin, er, uh, whatever…

Well said, Bill. But I think you meant to write “apologize on behalf of half of humanity.” The other half of humanity has no internet access at all (internet access just eclipsed 50% of the world’s population this past year), and thus they should not bear any responsibility for the cryptocurrency craze.

Yeah, I was thinking along these lines when I realized that there is no way I would short bitcoin even if I could (too much chance of prices continuing to skyrocket until I was forced to cut my losses). Then I came to my senses and realized that I only want to make money providing value to society. The people that buy into bitcoin will be hurting enough financially. We don’t need to prey on their consumerism also.

1. Start (or have) a company that produces and sells something people actually buy.
2. Get listed and sell some shares. Keep plenty for yourself.
3. Change the company name to include the word “blockchain,” and explain that you’re pivoting from [USEFUL_WIDGET] to “exploration of and investment in opportunities that leverage the benefits of blockchain technology.”
4. Profit!

I considered “investing” in Bitcoin back in the summer, but decided to spend my time doing other Mustachian things such as enjoying the outdoors and spending quality time with family and friends. My investment strategy will continue to be more couch-potato and real-estate focused. Why? Because “An investment is something that has intrinsic value.”

You know things aren’t a good “investment” when there are Bitcoin ATM’s at bars. It can be entertaining, though, to sit there and watch people who just happen to have $7k in small bills on them feed it into the machine at 2 am.

You know what else they have at bars? Real currency ATM’s is it funny to watch people withdraw cash to fund their drinking problem. Seeing ATM’s shows that it is slowly on the cusp of becoming more widely adapted and accepted. One of the 3 points MMM stated it needs.

Great article! Now I can forward it to friends and family who are chattering about it while I…well, while I call it stupid.
Maybe a “real article” will get the idea to sink in. Either way it won’t end badly right?
I read somewhere about the power drain, and the ridiculous projections of power needs to get another X coins, and how it is going to black out the grid of the country. Not just stupid, insane.

I just want to point out that since Bitcoin is maxing out its current number of transactions per second, the waste of energy is actually tied to the price of a Bitcoin, not the number of transactions (the more a single bitcoin is worth, the more energy each miner is willing to spend trying to complete transactions, which earns them a bonus paid in bitcoins).

The good news is that more transactions alone wouldn’t raise the energy cost (although more transactions are currently impossible anyway), and if Bitcoin raised the price of electricity in one country it would probably just cause people to mine somewhere else.

The bad news is that this means Bitcoin is going to keep wasting more and more electricity as the bubble goes on, and it doesn’t matter that no one uses it anymore.

So basically you don’t understand any of this, therefore it must be a scam. What a bad article. Herd behavior? Or maybe you don’t understand how exchanges work. Have you ever taken a look at how correlated the stocks of an index were?

I don’t feel like making a well-constructed arguments because I’m tired and this may make me look like a fool but frankly, I don’t care. Cryptocurrencies are extremely risky. Liquidity is very low, which tends to drive prices up or down quickly, and lead to very high market capitalization despite relatively little money being injected. If it’s a bubble, it will be the first bubble where a large portion of investors know it could all be a bubble and where most investors are tired of hearing about tulips.

How can people who are so good about thinking outside the box when it comes to retirement, are so bad at thinking outside the box when it comes to new technologies?

Blockchain isn’t just a software protocol, the algorithm guiding it doesn’t have to be open source, some cryptoassets pay the “miners” for securing the network through concepts such as proof of stake and delegated byzantine fault tolerance, some networks support decentralized applications with actual potential and have intrinsic value.

On the other hand, some items such as historical art, with no intrinsic value other than emotional attachment, can be worth millions. Why? Consensus over its value. Bitcoin is extremely risky, but it is not dumb and its value is also based on consensus. I’m sorry MMM, but the consensus is that your fingernails are worth nothing (you couldn’t even pay me to hold them), and that 1 BTC is worth more than your bike. Bitcoins are scarce, your fingernails are not. Bitcoins can be traced, your fingernails can’t. Bitcoins aren’t duplicable, your fingernails could be replaced by other fingernails and nobody would notice unless they do a mass spectrometry. Bitcoins will never degrade over time, your fingernails degrade. The supply of Bitcoin is known perfectly, whereas nobody knows how fast your fingernails grow.

Why Bitcoin and not another coin? I don’t know, why gold and not platinum or palladium? Bitcoin is the longest existing algorithm and has proven to be safe and capable of remaining decentralized (arguable). It is the main currency by which you can obtain other cryptocurrencies. However, Bitcoin is one of the least performing major cryptocurrencies, so let’s not talk about fucking Bitcoin all the time just because the price of one unit is in the thousands. There is a high chance that Bitcoin doesn’t remain #1 forever because there are so many cryptocurrencies, many of which with very different applications, including some that aren’t even based on blockchain technology.

For the first time in history, a machine can own “money” and make its own purchases. That’s something worth giggling. Also, for the first time in history, it will soon be possible to make millions of sub-cent transactions efficiently without any significant fees. That’s cool. Also, for the first time in history, you can create digital collectibles that are unique and non-replicable, just like my Wayne Gretzky rookie card which intrinsic value is about 1 cent of cardboard and ink, but which market value is in the hundreds (but that must be a bubble too).

I agree with you. This article is pretty below par in its research and very one sided. Basically Mr. Money Mustache seems to not see anything beyond the Federal Reserve and the toilet paper this ‘private bank’ of the elite churns out!

Keep fighting the good fight, Vijay. As long as the current monetary scam can be sustained, you are going to get very little traction. Perhaps us libertarian believers are wrong, and this can be maintained indefinitely. Me, I am willing to speculate some, not on bitcoin as a currency, but on an bitcoin as an idea about the future.

Don’t you find it strange, though, that my grandfather used what you call “toilet paper” to buy his first car, and his first house?
Then my father used the same “toilet paper” for his cars and his house?
Subsequently, some 70 years later, I’m still using that “toilet paper” to finance my retirement, buy cars, houses and all sorts of things?
How many decades of using “toilet paper” as a useful medium of exchange are required before you reevaluate your position?

Bro, we get it…you want to wipe your butt with germ-infested cash. Please let it go. You sound like I poop-obsessed wing nut.

Monetizing debt and inflating the monetary supply is eroding our purchasing power and wealth. The strategy isn’t sustainable. You’re 100% right that fiat currency is only good when people trust it…and that trust could be ZERO. That has happened before in the world.

MMM said “Government-issued currencies have value because they represent human trust and cooperation.”
It’s odd he believes people require a government to establish a system of trust and cooperation.

> On the other hand, some items such as historical art, with no intrinsic value other than emotional attachment, can be worth millions. Why? Consensus over its value.

That’s pretty much it. People fall in love with works of art. People’ve been lusting after gold (god knows why) for millennia because it clearly arouses something inside them. And gold has at least *some* practical value – you can make attractive jewelry that doesn’t tarnish, use it in electronics, dental fillings.

> . Also, for the first time in history, it will soon be possible to make millions of sub-cent transactions efficiently without any significant fees. That’s cool.

It is cool. But not possible with Bitcoin – transaction costs for BTC are up in the integer $ range and can take hours. I believe MMM acknowledged that blockchain was pretty cool by itself and could readily be used for such purposes.

> There is a high chance that Bitcoin doesn’t remain #1 forever because there are so many cryptocurrencies, many of which with very different applications, including some that aren’t even based on blockchain technology.

Pretty much. That’s why it’s unwise to go all-in on something just because it’s going up. You may be smart enough to recognize why one currency is going up and another isn’t and to not go all-in on something. Most people understand nothing apart from “my friend bought some BTC for $5k last month and now they’re worth $20k”.

Check out RaiBlocks and other DAG-based coins. 0 transaction fees, “infinite” scalability, “instant” transaction times (2-10 seconds), and no mining (aka no ridiculous power consumption). Bitcoin 2.0 is already here, people just don’t know it yet.

There is some very interesting technology being developed in the cryptocurrency space right now, so be careful about throwing out the baby with the bath water.

Good points. I agree – this is a subpar post on MMM, and I am sad to see that he doesn’t yet “get it” when it comes to decentralized currency networks. His rhetoric about trusting the “wise elites” of the Federal Reserve also irks me. ;)

Like they say, speculation is as old as the hills. Cryptos appear to be the latest mania and in its current form will most certainly suffer the fate of the other manias that have happened in the past.

Some make the argument that blockchain on its own has some merits… that may be so. However when every “Joe” on the street becomes an expert in an asset…then its suspect and you don’t need to be clairvoyant to know that this will not end well.

The growing demand for more electricity is the most serious issue with Bitcoin, IMO. Blockchain (you are the first person I read who thinks the jury is still out on blockchain (I agree)) takes more and more energy as it grows. Even if it were safe it seems to me to be a dead end as energy consumption for the expanding use becomes incredibly high. I’m not an IT guy of engineer so I could be wrong, but the energy issue and the safety issues you mention makes Bitcoin tera incognito for all intelligent human beings.

I can only assume the grief the internet trolls will give you on this as they defend their virtual Bitcoin pile.

Please don’t take the Proof of Work Blockchain like Bitcoin’s as “the” Blockchain. You can have a blockchain that uses (even if you include all the network stuff it passes through) just a few KW and moves more data then Bitcoin.

You can even have a social media/blogging site based on a blockchain, like steem/steemit.

I’m 100% with you when you say investing in bitcoin (and other cryptocurrencies) isn’t smart. I’m not so sure you’re right about mining them though, especially if you mine with computer hardware that you already have. Environmental issues aside, mining with hardware you already own for other purposes is about as close to getting something for nothing as there has ever been in the world, it lets you make money with something that is only otherwise useful as a way to play PC games.

I don’t have time to play PC games 24 hours a day, so I might as well use my fancy computer to make some money while I’m away from it.

Yeah, I’ve discussed the mining with my friend from NVidia. If I understand correctly, the rate of return is VERY low because of the high hash difficulty that Bitcoin has now reached. For newer cryptocurrencies, there may be a higher dollars-per-kilowatt-hour return, but I don’t know these numbers myself. Do you have any stats to share?

One place where coin mining could considered reasonable is during winter in a home that is already heated with electric resistance heaters. Since every appliance (computer, lightbulb or actual heater) is a 100% efficient electrical heater in a thermodynamic sense, you could shut off your heaters and run mining computers instead, to get the same amount of heat.

But, these days you shouldn’t use resistance heaters except for the lightest heating loads, because they are obsolete. Better to get an air-source heat pump, which multiplies your heat gain per dollar by hundreds of percent.

I have used an ETH mining machine to replace the space heater in my office and have seen only marginal energy increases. It isn’t enough to live off of, but it’s definitely nice to have a net $500 or so in my pocket at the end of each month. Undoubtedly the bubble will burst or mining difficulty will increase, but I’ll be able to sell this supercomputer to some nerd play World of War Craft on.

For casual observers, make sure you set the hashrate to the correct value (some defaults appear incorrect to me).. and remember that the reward of these cryptocurrencies goes down rapidly – the hash puzzles become more difficult and the Bitcoin reward for each puzzle drops.

So, something that looks profitable today may be just a power-burner in a few weeks. And whenever the price bubble pops, you also have a $2700 paperweight.

Also, not all crypto currencies use PoW to mine / verify transactions. BURST ( http://burst-coin.org ) as an example uses PoC (Proof of Capacity). It once creates large rainbow tables on Disk. Then the mining ist just looking up data in this table. Compared to bitcoin it uses only a fraction of energy.

I think your point about time wasted is very accurate. Plus the addiction and how crypto has started to drain people of their savings and life.

However, in 2004 when Facebook was being launched it was looked at as a funny little friend site. An investment then would not be considered wasteful now. Even though it really is nothing but cyber reality.

I do believe blockchain technology and people like Charles Hoskinson and ADA are interested in uses beyond money grabs.

Qaddafi was taken out because of the Dinar. I’m not saying Bitcoin is the saviour of USD imperialism. But there are interesting aspects to the technology and what it could develop into.

Discussion with friend from nVidia is irrelevant to bitcoin mining. GPU mining is dead. Bitcoin is mined using ASICs, not nVidia’s graphics cards. Bitmain’s S9 efficiency is at ~0.1 J/GHs. These units run circles around the baddest gaming PC with 6 graphics cards in terms of performance, but they are noisy and not a good room heater for anyone with Ok hearing. Mining other coins can still be profitable with graphics cards, mainly ETH/ETC. Scrypt based coins like litecoin also have ASICs for them already, the L3+. coinwarz.com keeps track of profitability, but it can rapidly swing with changes in coin price. No one is suggesting that investing in mining is a good idea. Buying some bitcoin and other coins could be rewarding in the long term. It certainly is for day traders in short term.

If you know anyone heavily vested in bitcoin, stay in touch with them. Soon, they will be on the brink of bankruptcy and you will be able to purchase all of their stuff at a discount. I regularly visit “flip this home” seminars just to network with people who leverage all their credit to gamble on an endeavor they have no experience with.

As a result, I have cashed out on their misfortune. It’s not that I enjoy seeing people suffer, but who am to talk them out of it? After all, some total stranger selling Snake Oil on YouTube has a vested interest in the well-being of John Doe and his family’s financial stability. Therefor, John will go on believing strangers on YouTube over me so I will be there to pick up the pieces when the house of cards crumbles.

Either way how about not alienate people based off their investments and act like an actual human being instead of a sociopath?

I understand this is an MMM forum but i mean come on.. you have to recognize that managed risk is a part of building wealth. Buying real estate, gold, stocks, even ETF’s and Bitcoins, all of these have risk. if you over leverage yourself in any of these you can find yourself in trouble.

I think that the point being missed in all of this is NOT that people want to evade taxes, but that they are being screwed backwards & forwards by the banks (& the tax evaders-in-chief that run them). C’mon, only wealthy people evade taxes in amounts that would matter & there’s a cottage industry made of tax lawyers doing just that for them. Poor people have never initiated a tax “loophole”.

So, all of the normal, previous ways of saving have been destroyed & the banks/corrupt bankers get bailed out, over & over & the regular people are sick of it. Even as these banks show SKY-HIGH PROFITS, they mostly evade their share of tax via loopholes. Meanwhile, the honest, hard-working regular folks see their interest both plummet to nearly nothing, and they then see THAT minuscule interest TAXED AGAIN! Well, SOMEONE has to keep the bankers & wealthy rich, right???

That, is where we’re at. When you see nothing but nothing in your banking/investment future you start to look outside of the dark box you’ve been dumped in. If the standard institutions weren’t a (gov’t-supported) bunch of crooks & were not in place to help only their cronies, this whole bitcoin situation would likely never have happened.

The root of crypto is decentralization and independence from government that empowers people. No doubt we are in a crypto mania now, but the concept of a global digital currency has been coming since Biblical times. Crypto is here to stay albeit probably not at insane prices.

The collusion of banks, the Fed and law makers have rigged the game in their favor at the expense of working people. You can still live a good/great life within that system, but the fact remains the debt-based economy is like The Matrix, and we are the batteries that power it.

MMMers have unplugged from debt, but putting all faith in the designers of The Matrix seems ironic.

Humans are conditioned for shortcuts in all aspects of life. This is yet another extreme example. Who wants to sacrifice to earn financial freedom when you can just invest in Bitcoin and achieve the same in less than a year. I’ve personally stayed away having learned these lessons in a past life. When I hear someone claim an “investment” in Bitcoin I end up smiling politely and correcting them on one point. It’s speculation, pure and simple.

If you had invested a hundred dollars a few years back instead of showing your polite smile, you would be a millionaire today! I have been hearing Bitcoin is a scam and a bubble since the time it was 200 bucks! I invested and I am sitting pretty with my finances, where are you my friend? Now, let’s see who is smiling?

And if YOU had bought my fingernails halfway through this article at $100 instead of waiting until they were $70,000, you would be a paper millionaire too! As long as you can find another willing buyer before the price crashes.

It doesn’t matter if it goes to $100 trillion per coin or per fingernail – the underlying speculation is bullshit, which is why it needs to be stopped.

I don’t invest in Bitcoin, but I’ve had this sob story in the back of my mind about how I “missed out” when I decided sometime pre-2010 to NOT mine Bitcoin. I was tempted by the “neat” aspect of being involved in this thing I knew would have some kind of future value – blockchain. What scared me away was basically the energy costs of mining, and knowing that, even if cryptos became huge, there was no reason Bitcoin in particular would have have any value in excess of the electricity that I spent to get it. Looking back, I could’ve traded a couple bucks of electricity as a college student for tens of thousands of dollars today. Doh!

But from now on, I’m going to replace that sob story with this: “Man, I missed out on MMM fingernail clippings!” to remind myself of the absurdity of that imagined “sunk cost” I’ve burdened myself with.

MMM i normally love your articles but you knew this one would be polarizing I’m sure.

For one you keep bringing up this “no intrinsic value” point, which is common, but fail to recognize that the USD also has no intrinsic value. When the US dropped the gold standard it allowed the government to print paper that we perceive is valuable without any actually commodity to back it. In a sense one could swap bitcoin to USD and the article still stands.

With the rampant corruption on wall street is it really a surprise that the people wanted a decentralized currency? Satoshi, while extreme in his views, watched the housing market collapse due to the fraudulent behavior of the banks and the government that backs them. This is why bitcoin was created in the first place. Big banks get crushed, millions of americans were underwater on their homes and forces to foreclose and then they get a bailout from the US of A paid for by your’s truly, the average american tax payer.

The government has done some sickening things to ensure the wealthy and powerful stay wealthy and powerful. i’m not some conspiracy theorist but I do see the value in a global decentralized currency (none of which is tax evasion btw, Every major exchange currently advises and provides you with a modified 1099-INT for you to file taxes, the IRS as well recognizes bitcoin as owning “property” and implicated short/long term taxes for owners)

Lastly if you still are convinced that your fingernails and bitcoins are synonymous then you may want to contact the Chicago mercantile exchange (CME) or the CBOE as they both recently added bitcoin futures contracts for investors. I’d love to see MMM fingernail futures one day on my ticker chart.

Bitcoin has its flaws and needs to improve as you mentioned:
Faster and cheaper transactions (improvements are being made, Lightning network)

Stable value (futures actually help volatility. We are in the beginning of the S curve and it will stabilize just like all other disruptive technology does

Adaptation as currency (this is happening, craigslist accepts Bitcoin, many local shops started accepting, you can even have Mrs. MM get paid by bitcoin on etsy. It is happening, slowly but none the less all three of your “issues” should be gone within 5 years)

Long story short bitcoin provides value. Is it speculation, sure, but it’s no different that speculating on the future price of a stock, or oil, or the rental market. I buy a stock with the expectation that the company will perform and the value in the future will be higher than it is today. I buy bitcoin with the expectation that bitcoin will solve the problems it currently faces and become more widely accepted thus increasing demand driving up the price.

“but fail to recognize that the USD also has no intrinsic value. but fail to recognize that the USD also has no intrinsic value. ”

That is wrong. Like every state currency, it derives it’s worth out of the fact that the state says you can *always* pay your taxes with it (and that shops have to accept it).
THIS is a form of trust derived worth.

And regarding Bitcoin as currency, it is already not usable as that TODAY. Transactions takes as long as for banks (and soon banks will do trasnfers in seconds too, the real life tests have already started) and cost MORE.

You call it trust. Let’s be frank. The real backing of the dollar is the force the U.S. government will use if it’s debts are called in.

C’mon people it’s not rocket science. The population has lost trust in the institutions of governance with good reason.

Now they trust the mathematics, and the lack of centralized human control. Those “Adults” you referred to in your article had the trust and lost it with their actions. Trust IS the value of Bitcoin.

Of course there is speculation. All these ICOs are just insane. I’d much rather invest in shares of Ripple Inc than in XRP. Of course there is value in regulations, too.

We live in a world where both can, do and will exist. Nothing is promised. Own as much Bitcoin as matches your understanding of Bitcoin.

I for one am lucky enough to participate in the birthing of an alternative financial paradigm so that people have choices. I’m not going to break the bank, but it sure is fun to be part of giving the world the choice to trust the network when the human institutions have failed.

Bingo, so far you are the only one that stated the true value of any nation backed currency, notably the USD.

Its trust is the full force of the weapons and arsenal behind it. Look at all the nations that proposed a EUR based oil exchange, all overthrown (no, not saying those were shining examples of humanity but the prioritization is simply correlated enough).

SatoshiJanuary 4, 2018, 6:59 am

Sure….. that is until the government keep printing it until it’s worthless. Take a look at the German Mark after WW1. They were literally carting around wheelbarrows full of the note because the hyperinflation the government produced killed the currency.

Personally i feel that the USD is rapidly approaching hyperinflation. Everything currently is too expensive. College, Medical, Cars, houses, Child Care, Stocks, Bitcoin, hell even dining out is all overinflated. On top of that, wages are not keeping up with the rising costs of living….

Hell isn’t that why we are here in the first place? Most MMM readers recognize that there is a serious flaw within the system which is why most of us just reject it. We don’t buy “average cars” or “average homes” we buy older cars, and smaller homes to cut costs and live a modest life.

I’m not trying to convince anyone that bitcoin is the savior of the world but to put total trust in ones government, one that has a history of corruption is ignorant. Bitcoin and other Cryptos are attractive for that reason and that why people spread this misinformation about it to sway people from backing it.

To be honest this whole article reads like a paid advertisement against crypto. I really would hope that MMM doesn’t sell out like most “social influencers” but regardless not understanding the technology is no excuse for spreading fear, uncertainty and doubt about it. I would recommend everyone to do their own research because many of what MMM says is plain wrong.

And to your last point Lightning network will be cheaper? dont understand why you say it will cost more?

“That is wrong. Like every state currency, it derives it’s worth out of the fact that the state says you can *always* pay your taxes with it”
This is also wrong, Zimbabwe did not abolish taxation yet the “worth” of Zimbabwe dollar has vanished anyway. Taxation does not give money purchasing power.

theirlong-term viability, you have completely missed the bigger picture.

Remember 2008? Do you really believe that we should “go all-in” when it comes to trusting our institutional financial establishments? Do you seriously think that corruption is not a big deal in first-world countries? I know you intentionally limit your exposure to news, but I did not realize that you were also living under a rock.

Humanity deserves an alternative to government (aka the financial elite) controlled money. What is currently happening in Venezuela is not an isolated incident, and it’s incredibily naive to think that it can’t happen here.

Just like we could end the climate castrophie in a couple years if everyone decided it was a priority and started working together to fix it, we can end milennia of war and economic oppression in just a decade or two, if we take back control of our money. Cryptocurrencies are the key to humanity’s survival.

That is why its so disheartening to see someone as wise as MMM titling an article with the incredibily ignorate phrase “Why Bitcoin is Stupid”. While I don’t consider Bitcoin an investment and I wouldn’t advise anyone to pour their life-savings into it right now, I do encourage anyone reading this to buy a small amount and start using it to make everyday purchases. Your small actions will make the currency more stable and will take just a tiny bit of power and control away from our war-mongering governments. It a high-tech form of protest.

On the other hand, if you’re cool with allowing remote-controlled robots to kill 3rd world women and children in your name, then keep using only US Dollars.

Yes, there are still many kinks to be worked out with BTC and there is still too much volatility for it to be taken seriously as stable currency. This is to be expected for a revolutionary new technology. Most of the 1000’s of cryptos (and maybe even bitcoin) will fail, but the few that remain will change the world.

Let me know when you find a buyer for your $70k fingernail clippings. In the mean time, I’ll keep selling the bitcoins that I purchased for $30 each at $15k a pop.

I’m selling because I agree that cryptocurrencies have entered the bubble phase, but when it comes to theirlong-term viability, you have completely missed the bigger picture.

Remember 2008? Do you really believe that we should “go all-in” when it comes to trusting our institutional financial establishments? Do you seriously think that corruption is not a big deal in first-world countries? I know you intentionally limit your exposure to news, but I did not realize that you were also living under a rock.

Humanity deserves an alternative to government (aka the financial elite) controlled money. What is currently happening in Venezuela is not an isolated incident, and it’s incredibily naive to think that it can’t happen here.

Just like we could end the climate castrophie in a couple years if everyone decided it was a priority and started working together to fix it, we can end milennia of war and economic oppression in just a decade or two, if we take back control of our money. Cryptocurrencies are the key to humanity’s survival.

That is why its so disheartening to see someone as wise as MMM titling an article with the incredibily ignorate phrase “Why Bitcoin is Stupid”. While I don’t consider Bitcoin an investment and I wouldn’t advise anyone to pour their life-savings into it right now, I do encourage anyone reading this to buy a small amount and start using it to make everyday purchases. Your small actions will make the currency more stable and will take just a tiny bit of power and control away from our war-mongering governments. It a high-tech form of protest.

On the other hand, if you’re cool with allowing remote-controlled robots to kill 3rd world women and children in your name, then keep using only US Dollars.

Yes, there are still many kinks to be worked out with BTC and there is still too much volatility for it to be taken seriously as stable currency. This is to be expected for a revolutionary new technology. Most of the 1000’s of cryptos (and maybe even bitcoin) will fail, but the few that remain will change the world.

The problem with speculation is that the few that get in early certainly do make hordes of money at the expense of hordes of people that get in when speculative mania is at it’s peak…inevitably to crash at some point. This has happened with EVERY speculative event throughout recent history.

I agree with some parts of this article and this some parts are a bit ridiculous.

I use purse.io to buy stuff from Amazon. Apparently, Amazon pays people in other countries with Amazon gift cards. They can’t use these gift cards. So, I use bitcoin to buy stuff with the gift cards from these people. It’s a win-win situation. They get to sell me their give cards at a discount and I get to buy stuff from Amazon for cheaper.

I don’t buy that much stuff. But I did put about $600 in Bitcoin over a year ago. It has now grown quite a bit, of course. I let it sit around 2.5% of my savings (I’m still growing my nest egg). But if it goes down, I won’t put anymore money into it. So, I harvest other people’s speculation and I don’t lose anything, as I have already harvested more than what I put in. I’ve made more per hour than I do at my day job compared to the effort that I have put into this.

I agree that Bitcoin isn’t an investment. But if you have some play money, it doesn’t hurt to speculate if that is what you enjoy doing and don’t mind losing everything you put in.

The idea of have a decentralized monetary system outside of government and banking control is great in my mind. Bitcoin isn’t that though. But maybe an iteration of that will be. I have shown from above that their is value in digital currencies. What value is there?

– I can leave the country with it if the government ever gets out of hand (I can’t do that with gold or cash since it will likely be confiscated or banks be frozen). Read your history, it happens occasionally.
– I can have a stash of cash that is inflation proof just in case the government decides to wildly inflate the currency. Read your history, it happens occasionally – even in the great USA (a few times actually). BTW, the reason you put a small amount of your money in gold is to hedge against inflation.
– I can trade with anyone in the world for a low price (not necessarily with bitcoin as the price has gotten expensive but with other currencies).

There are other points that I can’t think of right now.

Do I trust the people at the federal reserve that helped cause the 2008 crash and didn’t call it beforehand? No. If you read your history on this subject you would understand why I don’t. They’re not very good experts. Having interest rates all the way down to near 0% without a good exit plan should give you some pause how much you want to trust these people. Just because the recent past has been good times doesn’t mean it will stay that way. As the people in Greece and Iceland found out, along with people in many other countries. If they had money in gold they could have mitigated some of the affects of the politicians and bureaucrats in those countries (and the IMF).

Trust is important. That is why I also invest in government bonds. Because I think they don’t want to devalue the money too fast. But sometimes they do. And you should be prepared for it. I’m not saying to build a bunker or anything but just diversify your portfolio for different economic times. Just because the last while has been great, it won’t always be that way. But I hope the good times continue for a long while!

Bitcart.io takes DASH. I’ve used it a few times and although they take a few days to funnel money to you in the form of Amazon credits, they have always come through. 15% off everything you buy on Amazon basically. Transaction fees on the DASH network are effectively 0.

Good comments Jon.
My disagreements w the article summarized:
gov issued currencies = Human trust and cooperation. … how is this different than a crypto?

Full anonymity and government evasion will not be one of its features. ..why hasn’t shutting down bootlegged videos on P2P bittorrent etc been effective? Even a war on drugs, which has a physical element, isn’t being won by central gov.

In a world of human trust, putting the wisest and most respected people in a position of Adult Supervision is a useful tactic…. I agree w jon. They seem less “wise” and more “credentialed”. Also, I wonder the extent of whispering in their ears & kick backs they could/likely do get. We’re human, so human.

Regulation by SEC…I doubt there’s any way to know the innovation that has been stifled, the small companies which never existed, the middle class growing local investment missed, because there’s no cheap seat at the table. Do we really want a place where you’re either an Amazonian or Walmartian? if they don’t open one day, the fragile world crumbles.

“Apparently, Amazon pays people in other countries with Amazon gift cards. They can’t use these gift cards. So, I use bitcoin to buy stuff with the gift cards from these people. It’s a win-win situation.”

Are you sure Amazon pays someone in unusable (to them) gift cards? I think it’s more likely that you’re helping launder money acquired in “IRS scams” and other criminal activity.

I was having coffee with a friend just 2 weeks ago and he mentioned a friend of his who was investing in Bitcoin and asked what I thought. Apparently the friend had doubled his money. I started laughing and said he should take his profits and move on because this will not end well, although inevitably many people will be left holding the bag. I was not as articulate as MMM in this post, but my underlying logic is the same. Don’t count on there being a greater fool to take this sort of “investment” off your hands.

I agree Jay. Not only stocks, but real estate and bonds are expensive as well. People are looking for something that is undervalued to put their money towards. Bitcoin didn’t fly off the charts until a couple of months ago, after (maybe) finding itself in the perfect storm to take a bubble to biblical proportions.

Cryptos may be the money of the future, but there is nothing sane about its rise this past year.

Great post, I have been content to sit on the sidelines and watch the show. For fun, I try to gauge how bad is the Fear of missing out is and how that corresponds to a peak. When I started to feel some FOMO, I know we have to be close to peak interest.

There is some potential in the future for the blockchain technology but we are just so early that its hard to pick winners.

I enjoyed the cancer pill analogy, probably the best I have heard of yet.

Great text. I agree with you. Bitcoin mania isn’t different from the dot.com mania or any other mania going back to the tulip mania. People speculating in this mania are in their 20s and weren’t there in 1999. They will have to learn the hard way.

Good to add this article to the (hopefully) growing list of rational explanations debunking the appeal of what my 76 year-old Grandma, a consummate investor, rightfully calls “funny money.” It pains me to hear friends, some of whom I have to believe are intelligent people, describing their vast spoils and commitment to cryptos. Bitcoin is a case study, and they have no idea (or choose not to believe) that they’re headed for the unfortunate future footnotes of that case.

Mr. Mustache. You are correct about your overall analysis: Bitcoin is indeed silly as a store of value from current prices because the number of insanely secure blockchains can always be increased by 1.

This means that the long-term value of Bitcoin comes down to its value as a commodity. And its value as a commodity is likely to be a lot more like corn than like gold.

However, there are a couple things you are wrong about here, and are worth commenting on. For one, your irrational hatred of gold, whose function for human beings you do not seem to understand.

Mostly: It’s shiny and pretty and makes great jewelry and chicks dig it. Yes, this is a function.

It also has technological demand. (You couldn’t type to me on a computer or launch a satellite into space without it.)

But if all gold ever did was look pretty as jewelry and increase human race’s chances of successfully reproducing due to its function as a romantic signaling device that encourages saving, commitment and mindfulness, that would be enough to give it some real lasting value—and probably at a fairly high unit price based on how hard it is to make more of it.

(Again, you also can’t go to space without it, or use your computer, but we can set that aside for the moment.)

You write that things that “gold, tulip bulbs, Beanie Babies, 1999 dotcoms without any hope of a product plan, “pre-construction pricing” Toronto condominiums you have no intent to occupy or rent out, and rare baseball cards are not investments.”

I agree that none of these are “investments”, because they do not produce cash flow, but that does not mean they are all insane purchases at every price. Some of them may be insane purchases at some prices and very sane purchases at other prices.

Yes, it is insane to value something highly solely because other people might value it. But some people actually DO value rare baseball cards and stuffed animals and gold and tulips at current prices, as “goods” in and of themselves. Whatever they are willing to pay to enjoy owning these things themselves is their business, and may make for a fairly “rational” purchase. It all depends on how much personal enjoyment they get compared to the cost to own them.

People like planting gardens. So buying tulip bulbs is not insane at a reasonable price. Some people like owning pretty jewelry. (Or computers or spaceships.) So owning gold is not insane at a reasonable price. On the other hand, paying a ridiculously high speculative price based only on what others *might* be willing to pay in the future—based on little historical or reasonable evidence—certainly is insane.

You write that “These are all things that people have bought in the past, and driven to completely irrational prices,”

But this is not necessarily correct in every case. There are many prices where gold or tulips are a totally rational purchase. Maybe not $500,000 an ounce or a bulb, but at some other far lower price, they can be an entirely reasonable purchase.

For instance, I believe I bought tulip bulbs for my wife at a price around $1 a bulb, and we were quite happy with them. Not a penny was wasted. They grew pretty flowers that we enjoy looking at. Some more attractive or reliable bulbs might even reasonably cost more.

We also both wear wedding rings made of gold and are quite happier with them than if they were made of copper or tin or lead or nickel or mercury. She’s allergic to nickel and tin and lead. I believe I may be allergic to mercury. (It’s also very hard to make jewelry out of.)

“…but not because they did anything useful or produced any money and value to society,”

This one is just simply incorrect. If a “good” provides value to just one person without hurting anyone else, then it provides value to “society”. This is because society is nothing but an abstract grouping of individuals. The happiness of society is made of the happiness of individuals and nothing else. There is no one to be happy but individuals. And “society” is comprised of them, and nothing else.

Anyway, if your argument were correct—which it partially is—then you of all people should be against fiat money systems like the US dollar in its current form.

After all, the ONLY thing that gives a fiat money its value is what someone else is willing to give you for it. (Aside from the threats of force that stem from legal tender laws.)

In this way, dollars are the ultimate speculation. Unlike gold or tulip bulbs or cigarettes or salt, no one desires dollars as “goods” in and of themselves. They only speculate that others may want them in the future.

Gold may be irrational, if you insist that it is. But if that is the case, then it is far less irrational than are dollar bills, especially over long periods of time.

It’s like Winston Churchill said: Gold is the silliest, most irrational thing you could ever use as money. Except of course, for all the others.

If you ever want to see what a real bubble looks like, please look at a long term chart of stocks—or dollars for that matter—priced in gold. If you have the courage. I dare you to look it up! :) If you’d like a link, just holler!

But yes: Bitcoin is silly at current prices. Doubly so because it is now so broken by its development team that it is perhaps the only cryptocurrency that I know of that doesn’t even work as currency. Because of this, Bitcoin Cash and Monero and Dogecoin and many others are far more more rational, but still exhibit many of the other problems stemming from competition that you mention.

Gold and tulips and coffee and salt and any other “good” at a fair price, however, are an entirely different story. There are many reasonable prices for these goods that are non-speculative in nature.

Incredible comment. Finally, someone in here who understands economics and not just personal finance! Value is subjective; not all speculation is irresponsible; gold and other odd stores of value have novelty effects.

The only thing I would add as a further disagreement to MMM’s article is that speculation is inherently a GOOD thing. The act of speculating on an asset is what drives it to its proper price; they are critical players in the process of price discovery. I dislike all this vitriol given to speculators when they are fully valuable members of an economic system.

You could grow more bulbs indefinitely. You cannot create more coins than are programmed to ever exist. Appreciate the term scarcity. Also appreciate the utility of sending value to anyone anywhere with an internet connection without asking a middleman for permission doing financial surveillance on you. Hard to shove a tulip bulb through the wires, eh? Also appreciate fungibility. Bigger bulb, vs smaller, vs healthy, vs rotted. Bitcoins are all the same, they are not numbered, they don’t rot and don’t have a shelf life. Comparing bitcoin to tulip bulbs is intellectually lazy or deliberately misleading.

I’ve been wondering this too. I agree with MMM that cryptocurrency in general is kind of dubious, and that Bitcoin is a particularly stupid implementation of it. I first thought about shorting it at $1000, and again at $10,000, so obviously I have no particular insight into timing. The thing that stopped me is that shorting it is a *pain in the ass*. You basically have to first deposit a lot of money (as a reserve) onto bitcoin exchange sites, which themselves are only loosely regulated and would probably become insolvent if bitcoin crashed. Then you have to pay a ton of interest to borrow it, and be lucky with the timing.

I was hoping that when bitcoin futures became a real thing, I’d be able to short it in a more normal way. But my preferred broker, Interactive Brokers, doesn’t allow shorting Bitcoin futures (the founder of IB seems very anti-bitcoin in general). I can’t help but feel that a big part of the reason for Bitcoin’s continued rise is that there’s no safe, practical way for us Bitcoin-skeptics to actually take a short position on it.

Definitely not. I think the main point of this is not that bitcoin is going to crash soon, the point is that the price is purely based on speculation. Shorting bitcoin would just be speculation in the opposite direction. Overall, it is just as likely to go up as it is down, especially in the near term, and is best to avoid all together unless you just love gambling and don’t care about losing money.

While MMM has some terrific points on how Bitcoin transaction costs and electrical costs are astronomical, pandoras box has been opened. Places like Singapore, Estonia, Switzerland appear to already working on converting their systems to digital cash. Why you ask? Well so they can monitor everything and where all the funds go. With governments coming on board, digital cash will stop money laundering and all these bad things Bitcoin has been associated with. Look at Cardano for example, they are building blockchain with built in treasury and KYC/AML endpoints. I wonder why. If you are disgusted with the mining costs of Bitcoin you should be but the fact remains new inventions like RaiBlocks has made cryptocurrency frictionless and without mining or fees with transactions at over 7,000 per second. More than triple the speed of Visa/MC. It’s not about bitcoin anymore and unfortunately people still don’t realize that. The cost savings from implementing everything on immutable ledgers has significant cost savings and automation of processes which is why there is so much speculation. Unfortunately for most people that think they are missing out on everything, they are being lead to Coinbase and only buying the cheapest tokens available, namely Litecoin because Ethereum and Bitcoin have gotten so expensive. As for spending your Bitcoin, I digress. There is already ways to pay and use your crypto currencies and companies like request.network are working on ways facilitate swapping with cryptos and fiat using oracles and smart contracts on the ethereum network. While cryptos are new, they also don’t meet the needs of traditional cash flow analysis but for a new asset class but just because it’s new doesn’t mean it’s a bad idea. In 2018 and 2019, expect the speculation to subside as more tokenomics becomes important for valuations. Lastly, once KYC and AML is figured out, I have a hard time understanding why people would even want to use paper fiat instead of a digital fiat.

A prescient article, but unfortunately, those of us that have investigated Bitcoin and come to the same conclusions(no interest in speculation, possibly completely value-less) must continue to put up with the Bitcoin bulls, and as seen in this comment section, they are extremely bullish. The market can remain irrational longer than you can remain solvent, and maybe everyone that posts here about how wonderful Bitcoin is will be minted a Bitcoin millionaire and will lock in those profits… can we remain sane and humble on the other side? Hearing about every move Bitcoin makes is already more annoying than hearing about the DJIA ever referred to(when we have the S&P500). C’est la vie.

As far as I’m concerned, this is the final word on Bitcoin. Everything you’ve said makes sense. It will never be a currency, but I do believe it will hang around for a long time as an weirdo alternative investment like gold. I am already looking forward to looking back and laughing at all the companies who did away with their normal businesses to become mining companies. (see: Long Island Iced Tea Corp. becoming Long Blockchain Corp.)

…That said, I did buy $300 of Bitcoin back in November (which is a tiny fraction of a percentage of our net worth) on the off chance it keeps escalating like crazy. FOMO!

Warren Buffet says don’t invest in what you don’t understand, and I don’t understand Bitcoin. (As Ronnie Chieng says, “What IS it!?!?”). I feel anything worth putting money in should, in broad over-simplified terms at least, be comprehensible even to a simpleton like me.

Perhaps its the utter lack of any regulation that baffles me, because blockchain I do kinda get, which is why I did put some money into IBM (yes, very un-Mustachian) after reading about their auto-encryption developments and it’s applicability in protecting personal info and consumer data.

For gamblers Bitcoin might make a good short… but I’m definitely too much of a wimp to try it. (…which is more Mustachian..)

I’m in the same boat. I keep thinking of that movie where the actor says “Explain it to me like I’m a 2 year old.”

So, Bitcoin is supposed to replace all forms of physical currency – in theory – because people don’t trust banks. But, don’t you initially invest money into Bitcoin thru your bank? Is the theory that eventually there won’t be anymore banks? (like ATM’s were supposed to replace Tellers years ago *eye roll*) And Bitcoin is replacing the banking system? Because the banking system is corrupt and big government can’t watch over it? Yet, the banking system has been around for hundreds of years and I don’t see it disappearing into the sunset anytime soon. We still need banks for other forms of financial services such as loans, investments, business services, etc.. Will Bitcoin replace that, too?

And what about physical forms of cash for private sales? Is Bitcoin eventually going to replace the physical green back dollars and coins in our pockets? Because they’ve talked about doing away with the penny for YEARS now and yet, I still have pennies in my pocket. And even if that was true, there are still many forms of private sales going on everyday where people don’t want a traceable form of payment / exchange. There’s illegal activity in all its shapes and forms (ie. drugs, prostitution, gambling, etc.) as well as all legal forms of private sales (ie. babysitting, lawn mowing, snow shoveling, etc..) So, how is Bitcoin replacing that? Because when the Northeaster blows through my town and knocks down a power line, I want to pay the 15 year old kid who knocked on my door and shoveled my driveway $30 bucks. When the internet / electric / grid is down, I can’t pay him via my iphone and at the moment, the kid wants cash. Or when I have to go to the grocery store to buy milk and there’s the sign that says “NO POWER, CASH ONLY” and my toddler is crying for milk, I’m going to pay them in cash. Again, how is Bitcoin replacing that?

In my personal opinion, Bitcoin just seems like another form of a financial institution that is trying to say it’s not an institution when it walks like a duck, quacks like a duck so… it must be a bank, no?!

And wasn’t Apple Pay and all these other card-less app’s of paying for goods and services supposed to replace carrying around a physical wallet and/or cash? Because I still can’t pay for groceries in my town without swiping a card or handing over some US dollars. So, how is Bitcoin better or different?

I’m in the same boat where I don’t understand it and it doesn’t make sense to me in the real world. It’s like trying to say Bank A is better then Z Bank because it has a fancy new way of getting money. I want to know will it make my day to day life easier? Will it get me my money faster? Will it help me achieve my financial dreams quicker? No? Then I’ll stick with what works for me now…. in my opinion.

I have no issue with the block chain. If it was instead patentable I’d buy some stock in the holder. I suspect it will have uses beyond public currency.

My issue is with the currencies themselves. Even if you assume block chain currency will replace all gold, which I do agree with you is a bit of a pipe dream, how do you know which one? All technology goes through a bit of a curve where new technologies have multiple competitors and slowly they formulate around standards and a smaller core group of players. What if anything gives a compelling reason that bitcoin or any one of these other currencies will end up in the group? If your chosen currency doesn’t win out it goes to 0 since if it has no users it has no value. Your in effect speculating on a winner even if you do believe the technology is the future.

I’m always reminded of VHS versus beta max but on a few thousand options scale (rather then two) and a higher risk if you choose wrong (at current prices). No one foresaw that VHS would win, and yet Betamax was gone not many years later. Imagine he same concept but at least an old beta max has some residual value if you still own tapes…

Another great comparison. I’m a younger kid so I definitely only heard of Betamax. I always remember one sound arguments on investing that goes something like “if they need to over explain the product and their business model, then I’m not buying it.”

I guess Pete’s point here is that block chain protocol has benefits but bitcoin is stupid. An example for this would be Ripple (like you mentioned above) which is working closely with banks to make international transactions better. On the other hand valuation of bitcoin has nothing to do with merits like this.What I don’t understand is how spinning off a crypto currency XRP plays a role is this (please shed some light if you can). I understand the concept of having an idea, building business around it with angel investors and later going public where you and I can invest but I don’t understand investing in something like XRP.

Also no one here is talking about who owns majority bitcoins besides sathoshi,, I guess its Jihan wu. So If Jihan wakes up on the wrong side of the bed and decides to dump all his coins then it will open up hell hole for every one else. This is no different from rich wall street people and government controlling fiat currency.

@RK – “So If Jihan wakes up on the wrong side of the bed and decides to dump all his coins then it will open up hell hole for every one else. This is no different from rich wall street people and government controlling fiat currency.”

@RK…

Firstly, if Jihan is that rich, it’s probably because he doesn’t spend his money. Anyway, what would he dump it for? If the currency is highly valued, he would do well to keep hold of it!

Secondly, Governments are (by definition) other people, spending other people’s money on what other people tell them are other people’s problems – often they screw up fiat currencies through simple incompetence – they have no motivation to get it right.

While I agree with your sentiment about Bitcoin — I have been echoing similar warnings to friends and family since it’s mid-2017 breakout to $2k — I think several other cryptos are definitely deserving of a portion, albeit small, of an investment portfolio.

Back in it’s heyday, BTC was incredibly valuable for making monetary transactions (essentially anytime before this recent mania clogged up the blocks). Some newer, better tech has now taken BTC’s place here (LTC or any DAG technology). Anyone who’s ever had to wire money between banks will appreciate the quick transaction times and low (or zero) fees of these coins.

“Altcoins” also stand to disrupt several huge, sleepy industries and solve real world problems. E.g. remittances, credit lending for undocumented people. Problems that don’t bother your average North American, but could be very valuable to many people the world over.

Some ‘Alts’ are even working with the existing banking infrastructure to get them up to speed and are acknowledging the unfeasibility of anonymity (Ripple, Cardano).

Right now, I think that this space allows people to be their own VC. If you feel comfortable developing your own metrics with which to gauge coins and want to invest in projects long term, you can.

So, I PayPal’d you the $100 for your fingernail clippings before I got to the part about them going for $70,000. Do I still get the full bag or just a portion of your pinky finger’s latest clipping?

I’ve been experiencing the Bitcoin frenzy from the sidelines, but I recently went all in, buying up 20 physical commemorative Bitcoins on eBay. They’re stunningly shiny, surprisingly heavy duty, and generating plenty of buzz on Twitter where I’m giving them away.

Big ERN just recommended me to your blog and now I see that you beat me to the joke I just made. I have accepted life’s nudge and opened up several pages of your blog and am working through them right after this

Stay on the sidelines. “The market can remain irrational longer than you can remain solvent.” No one knows what the stable value of bitcoin will end up, and betting in either direction just seems like a fool’s errand.

Dang! As soon as I read you were selling a bag of your nail clippings for $100, I thought to myself that is a great deal! I could definitely sell these for more later. I was excited to get in on the IFCO (Initial Fingernail Clipping Offering) but the price had already shot up while I was reading. I was so sad that I missed out again ;)

I linked to Aswath Damodaran’s video on my Bitcoin post also. I like the way he analyzes investments.

Totally agree about cryptos- but not sure gold should be lumped in with them.
Why?
1) If gold is a bubble, it is a > 5000 year one…
2) lots of other things are used as a ‘store of value’ (paintings, etc)
3) If you are retired, with enough to last you the rest of your life even in cash, then you have eliminated most risks (market crash etc) but not all- the currency you hold your wealth in can fall greatly. Holding gold is not an investment in this case, it is a hedge.
Yes, you can hedge in other things, but gold is fungible, dividable, small enough to hide, and has been valuable for centuries. I am not trying to promote it for this purpose, but it is not an invalid choice. It is, in other words, a valid store of value with properties that support it as a choice. Not everyone agrees, but it cannot, unlike cryptos, be regarded as ‘stupid’.

I totally agree. I really enjoyed the MMM article but I strongly disagreed with the part about gold. Gold is not an investment, but it is an excellent form of money. Gold has the 2 most important properties to make it function as money, scarcity and intrinsic value. Bitcoin only has one, scarcity , and even that is debatable. Fiat currency has neither. The only reason the dollar is working as money is because it started out with gold backing and then they gradually removed the backing.

One thing that most people seem to miss about why gold was favoured as a form of money (scarcity and shininess) is the fact that it literally lasts. Gold is relatively inert (won’t rust except for very tiny amounts of oxydation), it is relatively easy to verify its authenticity (it’s malleable, the good ol’ biting the coin to see if it dents, you can melt it to look for impurities as well as hard to fake the colour with lead based forgeries).

That is why our civilization used that rather than perishables or iron. While silver and copper has been used as a form of money (notably imperial China, it was a silver based society with gold used as a “high” currency”), gold’s special attributes has always been seen as a form of value storage and trusted trade medium.

As for USD working has many reasons, required to participate in the largest economy in the world, the military power behind said economy, etc.

Don’t plan on investing in cryptocurrency. Maybe a couple years from now when the mortgage is paid off and we have some play money/money we can afford to lose. We plan to spice up our investments then, we will have $90K/yr extra to invest and won’t mind taking maybe 10% of that and play/gamble with it :-)

One thing in that seems to be missing in this conversation that ‘Bitcoin maximalists’ will always point out:
The security of the Bitcoin blockchain. Probably because it was the first and still the largest blockchain based tech, a lot of capital has gone into Bitcoin mining equipment. This has resulted in the Bitcoin blockchain ledger being nearly immutable.

Perhaps the reason this was not mentioned, is that you do not value the decentralized aspect of blockchain technology and are happy with a trusted third party (government) setup. Which is fine, but this trust-less nature of Bitcoin is what the early adopters valued. (Now, as you mentioned, it is most likely just speculation driven by greed).

Personally, I am out of Bitcoin because it is no longer useful to me. There used to be cool arbitrage opportunities on a website called purse.io, where you could buy amazon products for a discount using bitcoin – but transaction fees have made those types of business models (temporarily?) obsolete.

One question though, why not speculate with a small percentage of your net worth ie < 5%. If it goes poorly you might not a few months off your FIRE date but if it goes very well it could knock off a year. If you're careful to invest in an altcoin that has a clear value proposition (ripple comes to mind) you can set it and check once a day at most. So long as you have the self control / personality to only invest what you can easily afford to lose and to not let it consume your time and energy (not true of most people but more so mustachians) then there seems to be a potentially large upside.

This is a non-sarcastic answer: The same could be said of buying a Powerball ticket every week. Just one, just $2, and it’s (hopefully) only a sliver of your net worth. If it works out, it’s a windfall. But it’s likely just down the toilet.

Fair comparison? Absolutely, so I’ll proceed with it. Reward for Risk is worse for Powerball. About a 1/3 of it gets taken before the IRS even gets their grubs on it. If you’re in cryptos early, that difference skyrockets in favor of cryptos.

Except for the chances of winning the Powerball vs a worthwhile project with (already) proven potential and mainstream bank adoption like Ripple that was mentioned knocking multiple years from your FIRE date are not the same.

I’ve been thinking of doing just that.. And then I put it off for a few weeks, and the price jumps up exponentially. It’s a vicious cycle, but I’ve just got to bite the bullet instead of going “Wah, it was $2 cheaper a week ago”..

Thanks for sharing your opinion! I’ve been watching this with fascination as it’s been a while since we have seen a hype and crash investment (because we only know which way this is going to go, right)???

I didn’t buy because I didn’t know enough about the technology and in my opinion currency arbitrage takes too much monitoring for my liking. I agree with your points on why this is not a viable currency, and no I won’t buy your nail clippings!!!

This MMM article seems almost contradictory to what has become an investment philosophy that reciprocates with many people. These ideas are most problematic:

MMM Says: Trust world governments to control fiat currencies.

This is the most blasphemous thing ever to be written by MMM. As strong, intellengent Mustachians, we must think critically for ourselves about what is implied by trusting fiat currencies. For those of us who live in USA and use the USD for our currency, what does it mean to trust that government, which is currently breaching 19 TRILLION dollars in debt (https://en.wikipedia.org/wiki/National_debt_of_the_United_States) while simultaneously reducing it’s revenue stream (tax breaks for everyone). Most of this money is being spent on military operations to secure foreign resources and kill people will dissenting viewpoints in the name of national security. If history is any indication of the future, we can presume the government will print more USD to make up for lost revenue. This puts USD straight into the bank the Federal Goverment and allows paying of debt. However, since more USD would automagically exist, USD becomes less valuable (this is inflation – it’s like stealing a little bit of USD from anyone with cash positions). Only the most weak and fearful people will allow themselves to be stolen from for the sake of mythical national security that comes from trillions of dollars of military spending. As we know from MMM teachings, safety and security are lies.

MMM says: There is no intrinsic value in cryptocurrencies

There is no intrinsic value in ALL FIAT CURRENCIES. However, some cryptocurrencies DO have intrinsic value, which is computational power. Research Ethereum further.

MMM says: Cryptocurrencies are useful for anonymity and evading the government which is bad because we need the governemnt and we need to trust each other.

Again, this is really only true for FIAT CURRENCIES. The paper dollar is anonymous! There is no reliable way to track or trace paper. It can be forged. It can be laundered. However EVERY SINGLE BITCOIN TRANSACTION IS PERMANENTLY RECORDED AND TRACEABLE. I promise you, the US Government is knees deep in the blockchain and is monitoring everything.

My Take: Cryptocurrencies have A LOT of problems currently. No one can say for sure whether or not the problems can be resolved and a highly transactable and stable currency may emerge. This is where the speculating comes in. Personally, I disagree that speculating is inherently bad. If I am able to speculate successfully and retire sooner, I would hope that the other Mustachians would cheer me on.

Good post. Speculation is fine, as long as you are using only money you are willing to lose. Also withdrawing profits consistently so that if a crash comes you are ahead of the game and only playing with “the markets money” by withdrawing at minimum what you already invested.

Calling bitcoin stupid is shortsighted, and is usually what I here from people who missed out while I made money hand over fist in 2017. Although I do get where MMM is trying put an emphasis on the difference in investing and speculation. Doesn’t mean you can’t speculate to help you get to FIRE sooner though. Take risks, but keep educated and with good money management.

100% agree. Nothing wrong with speculation, as long as you are doing so responsibly and understand the risks. Is having 1-2% of my overall portfolio in cryptocurrency ‘stupid?’ No, not to me. The potential upside outweighs the risk of the initial cost. If you’re in a position to do so, go for it.

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